Education & Information
Major Trends
Supply and Demand in Balance
- No major buy or sell signals
- Weak buy signals followed by weak sell signals
- Highly defined support and resistance levels
- Occur at major top and bottom formations or in consolidating patterns during a strong trend
- The break of these balance patterns usually result in a strong initial move in the direction it is broken.
Balancing patterns consist of trend-less, sideways moving action across the chart. During this pattern neither demand nor supply are in control of trading, rather they are balancing each other preventing the stock from making a strong advance or decline. Think of it like a tug of war. In the chart above, you can see the balance pattern exists between the low $20’s and $30. Whenever demand pushes the stock up to $30, supply meets the demand and it begins declining. Once it gets back down to the low $20’s demand meets the supply and pushes it up towards $30 again and the cycle repeats itself several times.
Balancing patterns are important for investors to be able to identify on a point & figure chart because once this pattern is broken, usually a strong move in the direction of the breakout will follow. Once a stock enters a balancing pattern one of two events will eventually happen. Either, all the demand gets used up and all the buyers who want to own the stock in the low $20’s buy it. If there are no buyers left and the supply persists the balance pattern will get broken in favor of supply. 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. The balance pattern is a battle between supply and demand. In this scenario supply has won the tug of war. If you owned a stock that breaks a balance pattern like this you would most likely want to sell it as it is likely to enter into a major trend with supply in control. The chart below shows an example of supply breaking the balance pattern.
The other potential scenario is all the sellers in the $30 range have sold and demand is still present. If the supply gets washed out and the demand persists you will see the balance pattern broken by a higher column of Xs above the previous columns in the balance pattern. On the chart below, that happens when the stock is finally able to get up to the $31 level breaking above the balance pattern. This action indicates the stock is likely to make a strong advance as removing the supply near $30 is similar to taking the lid off of the price.
A balance pattern that occurs after a major trend higher and is broken to the upside is just a consolidation of the recent advance prior to another advance emerging in the main up trend. If this balance pattern is broken to the downside by supply it might indicate a change of the major trend to supply taking control. To make this conclusion, we would like to see the bullish support line also penetrated as the balance pattern is broken by lower columns of Os. In these cases a long-term toping pattern may be in place for this stock.
Conversely, a balance pattern that occurs after a major decline and is broken to the downside is just a consolidation of the recent decline prior to another decline emerging in the main down trend. If this balance pattern is broken to the upside by demand it might indicate a change of the major trend to demand taking control. To make this conclusion, we would like to see the bearish resistance line also penetrated as the balance pattern is broken by higher columns of Xs. In these cases a long-term bottoming pattern may be in place for this stock.