VSA Signs of Weakness Principles.

SOW – Principle 1 

Up‐bar on a narrow spread, close middle or low, volume very high or low. Weakness always appears on  an up‐bar because professional selling has to sell into a surge of buying. The narrow spread indicates  supply. Something has capped the top end of the market. Selling, or lack of demand from professional  money are the only two things that can do this. If the volume is high plus this will show supply. If the  volume is low this will show lack of demand. Check for old resistance levels to the left.

SOW – Principle 2 

Markets are constantly being traded.  A sudden down move will lock many traders into poor positions  as they wait and hope for a rally to get out with little or no loss.  If after a reaction the market then  starts to go up, then any old resistant level will require effort to go up and through these old highs  because they have to overcome the selling from these locked in traders.  To approach an old high on  low volume and narrow spreads indicates that the old highs are not going to be penetrated because  there is no demand.  If the market is not going to go up then it is going to go down.

SOW – Principle 3 

This is known as effort versus Result.  Any indication of strength you should expect a strong market.  If  the next bar is down on a wide spread closing on the lows and the low and the close is lower than the  previous bar this is a countermanding signal.  You do not fight the market but you have to assume that  there has been no result from the SOS therefore the market must be weak.  If the original indication  was genuine SOS then professional money would immediately move into the market giving higher  prices not lower.

SOW – Principle 4

The Up‐Thrust.  Up‐thrusts are there for a very good reason and that is to trigger stops in a weak  market.  However, many chart patterns look like Up‐Thrusts but fail to live up their promises.  The UpThrust has to look right.  It has to be in the right place.  Many are created in a strong market by gapping  up at the opening then falling off for a rest only to carry on up.  The genuine ones are easy to see.   Basically you should have SOW in the background not SOS.

SOW – Principle 5

Up bar on volume less than the 2 previous bars.  This indicates lack of demand from professional  money.  This comes into its own on short time frames.

SOW – Principle 6 

 A down bar on a wide spread plus closing on the low pushing down and through a previous support  level.

SOW – Principle 7

 Strength appears on down bars especially if the bar has closed in the middle.  Here this is discounted  because the high is higher than the previous bar.  This is a hidden up‐thrust and a SOW.  This principle  arrives in a variety of disguises.

SOW ­ Principle 8 

A surge in option volume.  Up bar after a rally and the option volume is very high.  Professional traders  will have a very good idea when a top has been reached and will enter the option market to hedge  their positions.  Seems to be clearer on a top than a low of a market.SOS

SOW – Principle 9 

Buying climax.  Up bar with wide spreads closing middle or low on ultra high volume.  Very powerful  SOW if there are no old tops to the left.  As a market keeps on going up day after day a point will be  reached at some time when many traders that have sold prematurely or those that are not in the  market cannot stand the constant higher prices and frenzy gives the trading syndicates and market  makers a golden opportunity to unload large amounts of stock at a high price without their activity  resulting in lower prices.  This marks the high point of the market.

SOW ­ Principle 10 

Top reversal.  This is a common sign of weakness.  The first bar is marked up rapidly, closing on the  highs (usually on good news).  The volume can be high (supply swamping demand) or low (no  demand).  The next bar rapidly reverses down, on a wide spread, closing on the lows.  If the low and  the close is lower than the first bar this adds to the weakness.  As with all these indications, it is  important to read the following bars for confirmation of continued weakness.