Education & Information
Major Trends
Demand in Control
Characterized by:
1. Strong buy signals above the bullish support line
2. Weak sell signals above the bullish support line
3. Mostly higher columns of Xs and Os
4. Balancing patterns broken by demand winning the battle
The chart on the previous page is an example of a point & figure chart showing demand in control of the major trend. It is characterized by generally higher columns of Os and higher columns of Xs. Remember, the Xs represent demand and the Os represent supply. The higher columns of both Xs and Os indicate demand continues to control trading while supply is weak. This major trend is in force only when the stock is trading above the bullish support line.
Stocks that have demand controlling the major trend will often times make strong advances, consolidate that advance, then make another strong advance. The cycle could repeat itself several times before the trend is finally over. The strong advances are characterized by higher columns of Xs and Os. Usually, there will be multiple double top buy signals during this phase of the advance. In the chart above, you can see this at the very beginning of the chart as the stock moves from $15 up to the $30 level. Notice how the columns of Xs all exceed the previous columns of Xs and the columns of Os are all higher than the previous columns of Os. There are four consecutive double tops during this phase suggesting demand is much stronger than supply.
When the stock hits $30 that chart pattern appears to change. The columns of Xs do not exceed the previous columns for several months and tend to stop near the same level for a few columns. Meanwhile the columns of Os also tend to stop declining near the same level over the same time frame. Notice how a few of the columns of Os stop declining near the $20 and $21 level over several months. When we see this change on the chart our conclusion is the stock has finally reached a price high enough for more substantial supply to be present and it is meeting the demand. This is considered a balance pattern as the supply and demand is in balance. The chart tends to move “sideways’. Think of it as the stock catching its breath after a run and gearing up for the next run. During balancing patterns the bullish support line tends to catch up to the level the stock is trading at following the earlier advance.
Once a stock enters a balancing pattern one of two events will eventually happen. Either, all the demand that pushed the stock higher (in the chart above from $16 to $30) has been exhausted and the supply persists. As the demand fades it’s like pulling the floor out from beneath the stock and the supply will push it lower. You will then see a column of Os decline below the previous columns of Os in the balancing pattern. You will also see the Os penetrate the bullish support line and the main trend will then be down with supply controlling the action. The balance pattern is a battle between supply and demand. In this scenario supply would have won the battle and it would be time to sell.
The other potential scenario is the demand is not exhausted and is able to meet the supply until all the sellers in the $30 range have sold. If the supply gets washed out and the demand persists you will see the balance pattern broken by a higher column of Xs. On the chart above, that happens when the stock is finally able to get up to the $32 level breaking above the balance pattern. This action indicates the stock is likely to make another strong advance as removing the supply near $30 is similar to taking the lid off of the price. See how the chart then goes into another string of higher columns of Xs and Os while demand is taking over once again.
The demand this time was strong enough to push the stock up to the $50 price level before another balancing pattern surfaces. Sometimes you will see weak sell signals during these balancing patterns. By weak we mean there is no follow through after a sell signal is given. An investor in a position like this should not sell all of there shares just because a sell signal is shown while the major trend is still higher.
Many investors try to sell stocks after they have reached certain “price targets”. To us this is foolish. Stocks tend to move to extremes both as they are rising and as they are falling. In the chart above, if a shareholder would have sold after a 20% or 30% profit was made, they would have missed out on a substantial gain. Rather than having a pre-existing price target in mind, it is better to let the chart tell you when the trend is over and that gives you the discipline to sell. If, during a balancing pattern, supply is strong enough to change the major trend you will see the balance pattern broken to the downside and the bullish support line will also be penetrated. Then you will need to sell. Too many investors sell their winners too soon and hold their losers too long. This is a good way too load your portfolio up with perennial dogs. To be consistently successful in the stock market you will need to learn to turn the table around. Hold on tightly to the winners that catch the major trend you were looking for when you entered the position. If the trend does not establish itself, then be a quick seller and keep the losses small. By managing your portfolio this way, you will eventually own a number of stocks that are in major up trends and be free of stocks that are in major declining trends.