The End of Rising Market and Bag Holding patterns.

For the sake of fairness let us acknowledge that you do not come across ideal VSA patterns in harsh reality too often, especially in the day periods of the market volatility. That is why let us look into the intraday charts in our search for useful End of Rising Market examples. Let us study the Gazprom stock market and unwind the time to the end of November in order to find a typical story.

Everything started from an information bomb in the mainstream financial media.

This news says:

Potential of the Gazprom stock growth on the dividend subject is assessed in 8-20%

Increase of dividend payments of Gazprom at 2018 year end up to double values can become a driver of the growth of prices up to USD 2.7-3.0 (RUB 180-200) by 8-20%.

According to the media, the Gazprom management prepared a recommendation for an increase of dividend payments of the company previously fixed for 3 years until 2020 at the level of about USD 0.12 (RUB 8) per share. It is assumed that if the decision about the dividend increase will be made, the increased payments will take place by the 2018 year results. According to the media, the Gazprom dividends can become “double-valued”, which gives ground to hope for the long-ago announced transition to the payment of 50% from the consolidated profit by IFRS (International Financial Reporting Standards) on dividends. In this case, an approximate dividend will be equal to USD 0.24-0.30 (RUB 16-20), which will bring 9.6%-12% to shareholders at the current market price of USD 2.48 (RUB 166).

The price rushed upward against the background of positive “insider” news in media about a probable price of Gazprom stock of RUB 200 per share.

Let us check the chart.

The grey bar chart reflects the general volume, the red-green bar chart is the delta or overweight of buys/sells.

The green arrows point to an indicative bar:

• narrow spread;
• high volume (note the delta. The indicator mainly shows buys. Perhaps, this volume reflects activity of the buyers who were in a hurry to buy for 160 and sell later for 200).

This bar corresponds with the ERM (End of Rising Market) criteria, however, the price continues to grow. Moreover, the stock is traded above the ERM bar during the whole next day. Why didn’t the market reverse downward?

Recall what Tom Williams said above:

By itself it is not a signal for selling, but a clear sign of weakness.

For sure, professional money had more large-scale plans and was not in a hurry to push the price downward before it accumulates enough shorts. And the bar marked with arrows simply specified the level where the pressure of a “crowd” of buyers met their first sell limit orders.

The professionals supported the stock price during the next days, warming up the market by stimulating the retail traders buys and forming, at their expense, a bearish position, since, in reality, they prepared for a downward movement.

And it started on December 11, when the Gazprom stock dropped by 1.5%. The downward movement continued down to the low of about RUB 146 per share at the bottom of December 25, 2018. The reason for beginning of this downward movement was the US call to the European countries for withdrawing from the Nord Stream-2 pipeline project.

So, what this situation teaches us about. It turns out that using a VSA pattern in isolation from the general context could be an ill-considered decision. Well, is it worth trusting and applying it at all?

Let us consider it in more detail. The intraday chart shows the trading dynamics as of January 25, 2019. The general volume is shown on the volume indicator in grey (it is nearly the same on the majority of the bars, since we selected the Volume type chart), while the delta is red and green.

The price made an effort, closer to the end of the main session, to break the high of the range formed during the first hours of trading. However, what does the chart tell us?

The chart never lies. Tom Williams

When making a breakout effort, the delta becomes practically completely green (trades on the exchange are initiated by buyers), however the price progress is not big and the spreads become narrower. That is, the buys that reflect:

• entries into longs of buyers “for a breakout”;
• exits from shorts of the sellers that set stop loss orders above the day’s high level (someone, for the sake of good order, “hid” the stop behind a “reliable” resistance 162.0) …

… met sell limit orders of professional intraday players that aimed to get a quick profit from the subsequent down movement by 70 kopecks. Well, the price reversed upwards later, but it is, as they say, a completely different intraday story.

Let us consider one more example of the End of Rising Market pattern. This time, an example from the futures market.

“Good” news came on December 7.

This news says:

December 07, 2018, 20:04

The RF stock market went up against the background of rallies in oil prices and strengthening of the rouble

However, what does the chart say? It can give a topical information about the demand and supply balance if you can read VSA patterns in the chart.

The picture below shows the RTS index futures trading chart with an hourly timeframe. (By the way, Tom Williams used the HLC (High Low Close) bar charts without the opening price).

The arrow points at the bar, which corresponds with the VSA End of Rising Market criteria:

• the prices grow but the dynamics slows down, which results in a narrow spread;
• a high volume, which is evidently uncommon for the bars with such a spread.

The next bar is closed lower. Tom Williams said that the bar, which goes next after End of Rising Market, should be closed lower, confirming a real weakness hidden behind that pattern. Note that the delta is positive. Tom Williams did not say anything about the delta since he did not use the cluster analysis.

However, ATAS provides us with an opportunity to look deeper into the End of Rising Market bar/candle in order to efficiently assess the situation. We can see predominance of the buyers (green color on the delta). But if these buys represent a real power, why did the price go down on the next bar? Perhaps, because the executed buy orders represent:

• entries into longs of the buyers, that get into a trap, “for a breakout”;
• exits from shorts of the sellers that set stop losses above the highs levels of December 4-5. Those who hid the stop behind the 116000 level also “burnt down”.

These are “poor quality” buys. The futures passed from professionals to the “crowd”, which suffered (as usual) losses and did not get profit from the further price reduction from 116000 down to 101640 (-12%) on the low of December 24.

This reversal is more transparent in the cluster chart.

1. End Of Rising Market. Note the bright green color on the Cluster Statistic Indicator;
2. The aggregation of red clusters shows levels, at which professional money “showed its cards”. It started to sell aggressively;
3. The seller’s aggression is evident, but ERM was the first sign.

Download ATAS and analyze reversals on peaks. You are sure to find a splash of buys against the background of the narrowing spread as a predecessor of a change of the market mood from bullish to bearish. And note that End of Rising Market works better at the levels where there are signs of weakness already.

We continue to analyze VSA through the use of modern instruments for the market analysis and move to another pattern – Bag Holding

The Bag Holding pattern is a mirror reflection of the End of Rising Market pattern. It is an “upside down” situation.

The name implies “hold your bag wider”.

• a narrow spread;
• the closing price is lower than the previous bar;
• the closing price is usually in the middle or close to it;
• the trading volume is much higher than the average one;
• the background – the period of downward movement;
• the next bar – the price usually goes up, confirming a hidden force on the Bag Holding pattern or is traded for a short period without changes on a small volume;
• the news background is negative. Sometimes the Bag Holding emerges when the price reaches a new record low or when there is a downward breakout of the round psychological level.

This is how one more VSA expert Philip Friston (a close partner of Tom Williams and manager of a hedge fund. He trades stock on the London Exchange, having started to study VSA in 1989) describes the Bag Holding:

The bar description:

• A down bar
• A narrow spread with an ultra high volume.

It is a rare pattern, but one of the strongest ones. It should be in the area of new lows. A point is achieved when the crowd is in panic and sells the stock at the lower price limit. The narrow spread tells you that professionals consume the whole supply that comes to the market (efficiently holding the bag in order to collect panic sells – the name originates from this situation). If they would not have done it, the spread would have been wide. There should be a clear downward trend in the background. Remember: in order to stop the downward movement in the market the demand should exceed the supply, which causes this movement. Naturally, this should appear on down bars.

As well as the End of Rising Market, the Bag Holding pattern is a rare thing in its ideal form. However, the principles that are characteristic for this pattern could be found, in one form or another, on many important lows.

Let us consider some examples.

On September 3-5, Microsoft was the news headliner in the American stock market. Its management decided to buy Nokia for USD 7 billion. The media covered this situation with pessimism, as if the plan was doubtful, risky and could result in losses. This negative news background accompanied the stock drop by 5% with the growth of volume.

Let us consider the chart in detail. The price went down on September 3 with a gap on opening (the gap brings “dramatism” to the drop and urges the public to panic sells). On September 4 (the bar is marked with an arrow) the drop slowed down, the spread became narrower, but the volume was very high – 2 times bigger than the average one.

Those were the days when Tom William conducted webinars for VSA students. As usual, in the end of the webinar, he invited his students to ask questions. The author of this article asked him whether the September 4 bar is a true Bag Holding pattern. Tom said that it was not the Bag Holding in its pure form, because even the local low was not reached, but this bar was definitely a sign of strength.

The price dynamics stabilized during the next days. And on September 10, 2013, the stock started an outstanding up-trend from the level of USD 31 per share. The growth lasted for 5 years and the stock went up to USD 113 per share (+250%) in 2018, making Microsoft a company with the biggest capitalization in the world.

What really happened? As you can guess, professional money used the price drop following “the bad news” on September 3 in order to consume the panic sells. The price and volume interaction testifies to it – the spread becomes narrower and the volume is high without development of the bearish dynamics. Having accumulated the MSFT stock, the demand and supply balance changed and the growth was not late in coming.

In an ideal situation, the Bag Holding appears only on an important low, which occurs twice a year or even more rarely. However, the principle that lies in the basis of this pattern, manifests itself, one way or another, in all markets, timeframes and chart types.

In order to confirm this bald statement, let us launch ATAS Crypto and open a nonstandard tick chart of the BTCUSD cryptocurrency pair on the Bitfinex as of January 26, 2019.

1. Arrow 1 points at the volume splash (mostly sells) after a sharp drop. This moment, with certain reservations, corresponds with the Bag Holding criteria. The previous two bars had a smaller volume but a wider spread. This observation is sufficient to assume the strong player’s support. The next bars confirm this assumption. Note the delta after the Bag Holding. It changes from red into green telling us that professionals moved from buys at buy limit to buys at the market price.
2. The second episode is too far from the classical Bag Holding signal, but, nevertheless, certain specific events also take place here. Perhaps, minor sellers thought that the downward trend would continue (which was suggested by the bearish signals of popular indicators) and decided to open shorts. But their sells met buy limit orders of professionals, the delta turned green from red and the cryptocurrency price went up fixing losses of “the crowd”.

Let us find the Bag Holding on the Moscow Exchange.

A bar, which corresponded with the Bag Holding criteria, appeared in the intraday SiH9 chart on January 18, 2019. Look at the picture below (the timeframe is 3 minutes).

The red arrow points at a narrow candle (assess a difference between the high and low). Note the delta behavior and the level, at which the VSA Bag Holding pattern appeared.

Perhaps, it is a manipulation on the evening session opening. The price was moved down, under the local lows, in order to “knock out” stop losses of the buyers. After crossing the local low level, the spread becomes narrower, the volume is above average and sells predominate (stop losses of hens came into action and the eggs got into the wolf’s basket).

The volume is also high on the next candle with a long bottom shadow and strong closing and the delta turned green. For sure, the manipulator completed his black mission on killing stops and moved from the buy-limit tactics to the buy-market one, pushing the price up.

The cluster chart clearly shows what happened.

1. The main accumulation of the buyers’ stop losses was here. At the expense of their activation, the professional buyers built up their long positions even more.
2. The price was moved a bit lower in order to disappoint those who thought “whew, it missed by an inch” a couple of minutes ago. But the red color goes pale and there are less stops.
3. And when a cunning professional cleaned up the level from stops and filled up his “bag”, he started to buy aggressively at market prices, pushing the price up, the sign of which is the overweight of buys 56% on the Cluster Statistic Indicator.

What happened the next day? January 19 was traded with a positive dynamics. But the buyers, who “hid” their stops under the local lows on January 18 failed to make a profit on it.

We considered two VSA patterns: End of Rising Market and Bag Holding. They are “twins” and are mirror reflections of each other.

Let us refer now to the primary source – the Wyckoff System. Richard did not use eloquent names, such as End of Rising Market or Bag Holding, for individual patterns in his works. To explain a situation he used the Law of Effort and Reward term. What effort and reward did he mean?

Imagine that you drive a car, which moves up a hill. You press the throttle pedal as much as you can, but the car cannot reach the top of the hill, although the slope is not steep. This is bad news for the driver. You made a lot of efforts (fuel) but did not achieve the result (the car failed to get to the top of the hill). Absence of progress, despite the efforts made, gives solid ground to assume that “something is broken”.

This law acts in the considered VSA patterns:

• End Of Rising Market. Efforts of the buyers (a high green volume on the delta) do not produce a significant result in the price growth (a narrow spread on the up bar);
• Bag Holding. Efforts of the sellers (a high red volume on the delta) do not produce a significant result in the price reduction (a narrow spread on the down bar).

If something that worked in the 20th century continues to work in the 21st century, it is worth using. You can apply the cluster analysis instruments for increasing your efficiency. Don’t you think so?

Check our publications in the blog. We will continue to speak about VSA patterns and cluster analysis.