Site icon Rubén Villahermosa | Trading and investing with Wyckoff methodology


Secondary Test

Tabla de Contenidos

The Secondary Test is the fourth event within the Wyckoff methodology schemes. Establishes the end of Phase A, stopping the previous trend, and gives rise to the beginning of Phase B, construction of the cause.

Functions of the Secondary Test

As with every event, one of the important points of its identification is that it identifies us with the context of the market; it gives us an indication of what to expect from now on. In this case, we went from being in a context of a downward trend to migrate to a context of lateralization in price.

This is very interesting since, as we know, the price behavior within Phase B will be a continuous fluctuation up and down between the limits of the structure.

With this background context, the type of trading that we will be able to develop here is to wait for the price at these extremes and look for a turn to the opposite side. Either directly from the time frame in which we are working with some configuration of candles, or reduce the time frame to look for a smaller structure of rotation there (if we are in the upper zone, we will look for a smaller structure of distribution, and if we are in the lower zone, we will look for a smaller structure of accumulation).

In functional terms what the Secondary Test suggests to us is the confirmation of abandonment by aggressive sellers who have been pushing the price lower and lower during the development of the downward trend; to evolve into an equilibrium environment where buyers and sellers are comfortable negotiating (building the cause for the subsequent effect).

Secondary Test Features

For the Secondary Test to be successful, the move must be made with a narrowing of the price ranges and a smaller volume than that seen in the climate event.

Although some authors defend the position that it is necessary for the Secondary Test to be kept above the minimum established by the Selling Climax (for the accumulation example), the truth is that it is a good moment to remember that the market is not a rigid entity, but that it is in constant change due to its own nature and that therefore it would be convenient to grant certain flexibility to the price movements.

With this in mind, we can attribute that a Secondary Test above the minimum Selling Climax would be seen with a neutral connotation when identifying which side (buyers and sellers) have more control of the market. So, it would be a good way to identify a certain imbalance on the part of buyers if the Secondary Test we see is performed over the upper half of the range; and it would likewise identify a certain imbalance in favor of sellers if the Secondary Test ends slightly below the Selling Climax.

This characteristic, together with the rest of the elements that have been commented on, as well as those that will follow, is an indication to take into account when assessing whether we are dealing with a cumulative or distributive structure. It is a question of putting the greater probability on our side and therefore, the more of these signs in favour of a direction, the greater strength our analysis will have.

The really important thing to look at is, in order of importance: the decrease in volume and the narrowing of the ranges. As we know, volume reflects activity and therefore, low activity after a climatic event denotes a lack of interest in that side.

The Secondary Tests of Phase B

Although the “official” Secondary Test is the one that appears in Phase A, it is a type of behaviour that we will continue to observe in different phases of the development of the structure.

Once Phase B has begun, we are going to be awaiting any type of test on one of the two extremes of the range.

This type of test allows us to evaluate the strength and weakness of buyers and sellers. Occasionally, tests will even be performed at both the top and bottom ends of the structure.

Depending on the subsequent effect of the range (whether it is cumulation or distribution), the tab pages are differentiated for the same actions. As it is logical, until the price does not leave the range we cannot know what was the real intention behind the cause that was being constructed and therefore, in real time any labelling should be valid.

Beyond seeing the market in a conventional way, we will also think in terms of functionality and differentiate price behaviors from two points of view: as a concept (action) and as an event (depending on the location).

Secondary Test on the upper end

The price passes through the previous maximum created in the stop action but does not move too far away before re-entering the range, leaving a slight jolt.

Initially it is a movement that denotes background strength as the price has been able to penetrate the resistance zone of the range; and this could not happen if there were no aggressive buyers present.

A subsequent evaluation will confirm whether it is really a strength test in which stock has been absorbed (bought, accumulated) with the intention of increasing; or whether it is a share on which it has been distributed (sold) with the aim of bringing the price down.

This new maximum can be used to establish a new upper end on which to look for effective bullish rupture (in Phase D) or bearish shaking of the structure (in Phase C).

When the range is accumulation/accumulation, this event will be labeled as Upthrust Action (UA); while if it is a distribution or redistribution structure we will label it as Upthrust (UT).

This is the only difference between these tags; if we believe with the clues that we have until now that the probability is in a cumulative range we will label it as Upthrust Action; and if we believe that there is more probability that it is being distributed we will label it as Upthrust.

When the UA occurs and the price remains above resistance for some time before falling, this behavior can be labeled as minor Sign Of Strength (mSOS). It would be a kind of test that denotes greater strength.

Secondary Test on the lower end

It’s a minimal structure test that produces a lower minimum. It is due either to the aggressiveness of the sellers or a lack of interest of the buyers, which suggests that it is likely new tests to that area in the future.

This type of test denotes a lot of fundamental weakness. Well-informed traders know that the price is overvalued and they have an urgency to sell. Hence the extreme weakness.

From this new minimum we can draw another level of support on which to wait for the effective bass break or the final jerk before the upward trend movement.

If we are dealing with an accumulation structure, we will label this event as Secondary Test as Sign of Weakness (ST as SOW). There is generally a better chance that this event will occur when the Secondary Test of Phase A has produced a lower minimum. There is an extreme weakness in the market and this area will need to be tested in the future.

When the range is distribution or redistribution we label this event as minor Sign Of Weakness (mSOW). One indication that we may be facing a mSOW is whether the Secondary Test of Phase A is a poor bullish movement, with very little path (lack of buyer interest).

As we say, we can only know which labeling is correct once the range has been confirmed in one direction or the other. Therefore, in order not to complicate it more than necessary, a simple solution could be to label such events as Secondary Test in Phase B (ST in B), a label that you will also find in some analysis of the methodology.

The generic test

A test, by definition, is an attempt, evaluation or examination of something. In the case of Volume Spread Analysis (VSA), it is a test to confirm who has control of the market.

If professional traders have higher interests, they will want to make sure that the bid has been eliminated or absorbed before starting the upward movement. Conversely, if they foresee lower prices, they will do their best to confirm that there are no buyers willing to complicate their downward movement.

As the market enters an area where previously there was a high volume two things can happen:

Due to the above, tests can be a great time to enter the market, because if the test is valid, we will be “betting” in favor of the force that presses more and that in theory has greater control of the market.

Where to look for tests

Due to its generic nature, it is an action that can be useful to make trading and investment decisions in different market contexts, being the most recommendable:

Test after shake

Known as the Spring test or the Upthrust test, it takes place during Phase C of the test, prior to the rupture of the structure.

This is the moment in the market when we can have the best risk/benefit ratio; since if the test is genuine, we will be very close to the end of the structure (where the Stop Loss order should be placed) and the route to the Creek could be quite wide (to take as first Take Profit or management).

Test after breakage

It takes place during Phase D, where the price has started the trend movement within the range and this is a critical moment as what is being evaluated is whether the Creek break will be valid or whether it will be a shake.

The risk/benefit ratio is not as generous as the one we may have in the test after shock, but even so we may have a great opportunity because if we are right in the analysis, the price will develop the effect of all the cause that has been built during the development of the range.

An example of Stop Loss location in this case could be to place it in the middle part of the structure, assuming that if the price reaches that level, more than an effective break we could be before a shake.

At the Take Profit level, you can use technical tools such as Fibonacci projections, a simple 1:1 projection of the total distance of the structure; or better yet, place it in some area where there is expected to be liquidity waiting.

Trend test

It should be noted that the price is in Phase E of the structure where the market begins to move tendentially out of range.

If the trend is very fast, it will sometimes take time to stop at least temporarily to develop a new scheme in favor of that trend. For such cases of speed, we can seek to develop this action, which will give us an opportunity to join the movement.

If the technical objectives of the structure have already been covered, I would particularly quarantine the entry. In the case of Stop Loss, I would expect the development of a jolt + test out of range to place the order at its end. For the Take Profit, the best thing to do is to keep looking for areas of liquidity as we know that it is very likely that the price will go in your search.

How the Test appears on the chart

In Volume Spread Analysis these types of candles are known as No Demand and No Supply.

The test is considered valid when the candle has a volume lower than that of the two previous sails, denoting as we say that lack of interest in that direction.

When we are faced with an environment of possible background strength (such as a Spring, a Creek bullish break or an uptrend) we will look for the test, in addition to showing a smaller volume than that of the previous two candles, to be produced on a bearish (No Supply) candle. The smaller the range of the candle, the better.

On the contrary, when our analysis tells us that we are possibly facing a weak market environment (such as an Upthrust, a bearish break in the Creek or in the middle of a bearish trend), we will look for the test to take place on a narrow range bull candle (No Demand).

The difference between the Secondary Test and the Generic Test

Conceptually it is the same action: movement that develops to evaluate the commitment of operators in one direction and that must necessarily appear with a decrease in the price ranges and volume to take it as valid.

The only difference is that the Secondary Test is a specific event of the Wyckoff methodology, with the connotations at a structural level already commented; and the generic test is a global event, well known in the VSA methodology (Volume Spread Analysis) that focuses primarily on the action itself and what its result suggests to us.

Exit mobile version