Demand Shock

How do you determine the trend of the market? Everone has a favorite method, but I like to use what I call demand and supply shocks to identify the path of least resistance.

A demand shock is simply a high volume, uncorrected, fast, wide range upward move. A supply shock is a high volume, uncorrected, fast, wide range downward move. When you see a demand shock the trend of the market has turned upward. When you see a supply shock the trend has turned downward.

In the 30 minute chart you see above this post the downward trend in the e-minis is clearly identified by a succession of supply shocks (red arrows). Each such shock was followed either by a further drop in price or by a sideways trading range. Today, for the first time in over a week, I think I see a demand shock. This is the reason for my belief that we have begun a rally of 40-50 points.

The main thing to keep in mind about demand and supply shocks is that the market never retraces them all the way. In fact, it generally never retraces as much as half the shock. There fore, as long as a demand shock has not been substantially retraced it is safe to buy reactions. As long as a supply shock has not been substantially retraced, it is safe to sell rallies.