VSA: No Demand & No Supply

No Demand (ND) is a complex phenomenon representing a process, which may run in an endless number of variations. The VSA strategy reduces the ND detection algorithm to a check of compliance of an individual bar with the above criteria. A trap appears here. “A narrow up bar on a low volume – it means ND – should sell” – it is a very light-minded decision.

How to avoid a trap when reading a chart bar after bar and how to start thinking in general. Follow the recommendations.

1. First. ND – as it was already mentioned – is a process. It can non-obviously unfold both inside a bar and over several bars in a row. It should be taken into account when analyzing the chart using the VSA method, especially when we do not speak about day periods.
2. Second. Mind the context. The No Demand pattern has a bigger weight if it manifests itself at the levels with the previous signs of weakness or under conditions of a downward trend.

These two recommendations are also true, with certain corrections, for the No Supply signal, which we would consider below, as well as, actually, for other VSA signals.

We had enough of the theoretical stuff, so, let’s do some practical one.

Let us consider an hourly chart of an RTS index futures (what a futures is). A recent example.

The price went higher than 122,800 during the daytime on February 5. But the trading volumes went down at this level (arrow No.1), which gave ground to assume the No Demand situation. After the evening session was opened, there was, most probably, an act of sabotage: manipulators activated stop losses of the sellers above the local high and reversed the price down. (It is an upthrust, we will speak about it in our next articles, so, check out our publications).

The next day, on February 6, the futures price dropped on the opening. The volumes are big and the delta is bright red. This change in the market behavior testifies to a real weakness and the No Demand pattern was among the first to send a signal about it. What a trader should do in such a situation under the VSA strategy? It is logical to implement “a bearish plan” and look for entries into short positions. The No Demand pattern again will be of use here.

Note the arrow number 2. It is an effort to go up, but the volumes are small. It is a potential ND. The market participants do not believe in further growth against the background of a sharp drop on the market opening. That is why we switch to younger timeframes and check clusters.

Note the splash of buys (A) in the 122,180 cluster and the following splash of sells (B) in the 122,140 cluster. Perhaps, these were:

• A – a trap for the buyers and activation of very close stop losses of the sellers. Perhaps, they opened shorts during the morning sale, but were thrown out of the market in point A. The professionals accumulated short positions under the hat using Sell Limits;
• B – the real sells. The incoming aggression of the sellers pushed the market below. This “breakage” level is now a priority one for opening shorts during the forthcoming cases of testing (not to be confused with the VSA Test of Supply). As you can see in the chart, further on the price stayed above 122,100.

Download ATAS and find the No Demand. Analyze the cluster chart and you will surely see similar processes but in different variations on peaks of the areas with a deficit of buyers.

Another example is from the gold futures market. Let us consider events of February 5-6 on the Moscow Exchange on an hourly period using the Delta Colored Volume cluster type.

Let us reason for a while:

• A – Most probably, a major player gained a short position on peaks on February 5 using Sell Limits. It can be seen from splashes of green clusters;
• B – “a breakage” took place here. A major player entered the market with the market selling orders and started to consume all available BIDs;
• C – the price went up to the level where “the breakage” was fixed or there was a change in the market mood. However, note that the growth took place on a low volume. This is the VSA No Demand pattern. Note the “paleness” of the clusters – it reflects a low trading activity. Most probably, the resistance level, which was built from the “breakage cluster”, will not be broken and will work properly, reversing the price downward. A false breakout of the peak of the previous bar happened on the next bar and the price confidently turned down, confirming reluctance to attack the area of the yesterday’s weakness. This false breakout was not a surprise for those who did not fail to read the ND in the chart.

Now, let us consider the “reverse brother” of the No Demand pattern.

No Supply, in principle, is “a reversed reflection” of the No Demand pattern

Let us check the Wikipedia again. The picture below shows a graphical interpretation of the Law of Supply.

Let us imagine that your Chinese auntie Aimin went to the market to buy nuts to bake cookies for her nephew. Alas, she forgot her purse with yuans at home. She was lucky to find some coins in her pocket. However, the sellers on the market did not want to sell nuts for a small change. Aimin was very unhappy. One of the sellers noticed that and asked her why she was so sad. She sympathized with Aimin (she also had several nephews) and agreed to sell her some nuts at a lower price than it was on the market.

This fictional story shows that sometimes trades in the market are executed at prices that differ from a fair equilibrium price. However, while the auntie Aimin story can happen in real life, things are a bit different in the financial market. There is no place for a good nature there and the trades at a lower than a fair equilibrium price are executed mostly due to misapprehension of the traders. Richard D. Wyckoff wrote about it in his method, which became a predecessor of the VSA strategy:

The Wall Street business is financing corporations and trading securities – stock and bonds – which are a result of this financing. Some papers are good and some – not much. Those who produce and sell them to the public, know their value better. The public has a comparatively weak understanding of their real value, except for well-known papers, which existed in the market for a long time.

hus, if, for one reason or another, the exchange price deviates from the real value of a security, this opens a profitable opportunity for entering a relevant position. VSA will help to identify such a case. It is possible to read the No Supply pattern from the chart, when the current price of an instrument goes too low in the undervaluation area, using the Law of Demand and Supply.

Look at a Tom Williams (the VSA founder) chart

Analyze the C bar. This is how Master Tom describes it:

This is a clear test. The price sharply dropped to be closed at the upper quarter and look at the volume – it is low. It is a very positive sign of the fact that the market is about to start the bullish movement. Why? Since the markets move the demand and supply. We saw that the stopping volume entered in Point A and we saw a test in Point B where the volume was, perhaps, just a bit lower. Now we have a very clear test in Point C, where the volume is clearly low. This means that there is no inflow of selling offers in this market. Thus, you should expect higher prices.

Note that Tom uses the “test” term. In order to avoid ambiguity, the “test” term here is short for “supply test”. The test is conducted with the aim to assess the volume of supply in the market. A successful test means the No Supply situation.

The “testing” term, which means “a bounce” from a certain level in the classical technical analysis environment, is different from the “test”, under which Tom Williams usually means the situation of No Supply, Supply Test. The price increase is implied after a successful VSA supply test.

So, in general, the VSA No Supply pattern usually looks like:

• a market effort to go down, …;
• … but the closing takes place in the upper part of the bar;
• the volume is low, which shows absence of interest;
• the next up bar on the growing volume confirms the NS.

Figuratively speaking the market submerges under the water. As well as a diver needs oxygen, the market needs supply. That is why it is natural that the price increases and the growing volume revives trading, letting in the sellers who are ready to exchange their commodities (cryptocurrency, securities – anything) into money.

On January 14, 2019, the Savings Bank ordinary stock price formed the day’s low at the level of RUB 194 per share (going down approximately by 1.7% in relation to the closing level of the previous day), but the closing price was RUB 196.80 – closer to the day’s high. The volume was not big – it was smaller than the volume of the previous three days.

A trader who reads a chart using the VSA method can see a bit more if he is equipped with a footprint. He realizes that the testing showed a deficit of supply at the level of the previous strong bar on January 9. Tom Williams would surely have said that this test have provided the professional players with confidence in their intention to move the stock further up. The chart verified the strong mood of the market and the further breakout of the RUB 200 level was not long in coming.

Clusters add transparency into understanding the ongoing processes.

1. January 9 – a real power entered the market. Practically all clusters are green. They demonstrate domination of buyers nearly at all levels. The price rapidly grows and breaks the resistance level (marked with a blue line). It is a real demand.
2. The No Supply testing. Note the red area on the test low on January 14. It is a splash of sells – most probably, it is an activation of stop losses of the buyers, who were smart enough to go into longs on January 9 but less smart on January 14, when they started to panic and to close manually by stop losses, located in the break-even zone. The market activity shows absence of a real pressure of sells and only a preparation for further breakout of the RUB 200 per share level.

One more example. Let us open something non-standard, for example, a 6-hour ADAUSD chart. It is the cryptocurrency market and data are taken from the Kraken exchange.

No Demand – is a failed effort of growth on a low volume. The market experiences a lack of liquidity from the buyers’ side. The further price decrease in a combination with the volume increase confirms that the market participants are not interested in the price increase.

The No Demand signals have a bigger weight:

• in a combination with other signs of weakness;
• under the downtrend conditions.

If the market still actively grows, showing the bullish mood in the price and volume behavior, then the No Demand signal could be just a short pause before a new ascending impulse.

The same is true for the No Supply signal but in the opposite direction.

No Supply (or Supply Test or just Test) – is a failed effort to go down on a low volume. The market does not experience a lack of liquidity from the buyers’ side. There is no interest in lower levels. The further price increase in a combination with (not extreme) increase of the volume confirms the bullish mood of the market.

The No Supply patterns have a bigger weight:

• in a combination with other signs of strength;
• under the up-trend conditions.

When the market actively goes down, the No Supply pattern could be just a short pause before a new descending impulse.

If you are inclined to use investment strategies and wish to buy the stock with the aim to hold it on a long-term basis, then the No Supply pattern (VSA test) can become your reliable partner for entering a long.

This is how a professional investor and VSA expert Philip Friston uses the No Supply signal for entering a trade:

I have my own process of stock selection, which corresponds with my risk profile (but it might not be good for someone else).

• First, I exclude the stock, which does not correspond with my fundamental criteria (every trader has his own criteria, but my list will include consideration of such things as the level of depth, cash flow, etc.);

• Then I need to check whether the parent index is in an upward trend and does not have a significant weakness in the background;

• Then I open the exchange chart and look for accumulation areas in the background and mark the support and resistance levels;

• Then I ask myself how the stock works in comparison with the parent index. Is it stronger or weaker?

Then, taking into account the background, I address to the right part of the chart looking for an entry signal of, say, the test on the growing market, trying to avoid entry slightly below the important area of resistance.

Thank you for reading this article. We will continue the VSA + cluster analysis topic, so, check out our publications.