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Supply and Demand in a Range

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Obligatory disclaimer:

I do not provide personal investment advice and I am not a qualified licensed investment advisor. All information found here is for entertainment or educational purposes only and should not be construed as personal investment advice.

Introductory elements:

Even though this is a hindsight re-visit of a range, I attempted to remain as unbiased as possible and highlighted the areas of interest as I’ve seen them in real time as PA developed.

Let’s get started with a higher timeframe overview of where price is and what levels we can find and see.

W2

I’ve chosen the W2 timeframe as it depicts the higher timeframe levels the best in this case.

What can we derive from this ?

There was a major rally up to 14k. Ever since price has been in a downtrend printing lower highs and lower lows. The last remaining support level at 7.6 enabled a bearish retest of supply at 10k and since than price has been going down and led to a bearish engulfing of support that led to an up-move which now should act as resistance.

It should also be noted that price is now in an important pivotal area, depicted by the blue box. Not only that, there is evidence on the W2 chart, that price has indeed dipped into demand here which led to the up-move towards 14k.

What can we do here ?

Blindly punting a long position is ill advised at this point, the previous W2 candle shows strong bearish momentum and we have to wait how price will react to the aforementioned blue box.

D1

As price is approaching our area of interest we can switch to a lower timeframe, for example to the daily timeframe as in the picture above. There is still no evidence of bulls returning to the market therefore we have to wait for a proper reaction.

D1

As price approached the demand area we can see how bulls pushed price back above the blue box taking out the swing low to its left printing a bullish SFP and getting rejected by the immediate retest of resistance (black) which shouldn’t be considered as bearish because it’s just a natural reaction to a level, what matters though is where price currently is and what it has done previously.

H1

Let’s zoom in a little bit more. This is where the interesting part starts:

As we have derived from our daily bias price dipped into macro demand and took out a swing low rallying back into resistance. Evidence shows bulls are active at these levels and thus we can look for longs here now.

What do we look for ?

There is some kind of hindsight in this involved but this method can be applied anytime and anywhere. We look for imbalances in the market.

From where did price rally strongly away from. I believe everybody knows nowadays how this looks on a chart.

Demand Zone

Down candle before an upmove

Supply Zone

Up candle before a downmove

On the H1 chart above we can exactly spot this kind of imbalance. This information combined with price dipping into macro demand and printing a daily bullish SFP we now can anticipate a dip into this demand pocket (grey box) and a short rally to approximately the weekly resistance level (red).

What we cannot do at this stage:

We cannot anticipate a break of support or resistance at this point. There is no evidence that either support or resistance have been weakened. Hence we are forced to play smaller moves.

H1

You can it either play it safe and take profit at logical resistance levels like the daily level at 7.2 or trail your stop and TP at the red box around 7.4. It’s important to know that we don’t know how far this move is going to be extended. Full on reversals don’t happen after months of going down.

H4

Evident on H4 we also have confluence on a slightly higher timeframe that bullish continuation is more likely. The H4 candle took out the previous lows, dipped into our little H1 demand pocket and price closed back within the consolidation. Especially on H4 we can see the potential of price rallying further and surpassing the daily resistance level (black).

H1

As price is rallying the wick above the D1 level is once again nothing more than a natural reaction to a resistance level. Putting everything in context the daily SFP bias is still stronger than a H1 wick.

H4

Given how the H4 candles closed after the H4 SFP we previously talked about continuation up into the weekly resistance or H1 supply below it can be anticipated. There is no need to be bearish at this point.

What we shouldn’t do:

Anticipating a break of the recently broken weekly support level now turned resistance same goes for a full on reversal.

Resistance until proven otherwise.

H4

As PA develops we can observe momentum slowing down at the weekly resistance level. Confirmation if price rallies away from this level.

H4

We fast forward 36 hours and see that shorting here wouldn’t worked out.

Now this is the part where some sort of hindsight is involved. But if we closely observe the H4 candles we can see how the bearish momentum within the red box is slowing down after tapping the weekly level (red) for the first time and kind of being range bound between the red box and the weekly level.

In these kind of situations you can ask yourself:

“Why isn’t price going down furthermore if this is resistance ?”

The same question can be applied to support as well:

“Why isn’t price going down if it is bearish?”

Or vice versa at resistance:

“Why is price stalling at resistance ?” or “Why does price not pull back from resistance if it’s bearish ?”

H4

Once again this is hindsight but evidences of this being a fakeout can still be derived.

Where exactly can we spot this ?

  1. Price is in a macro downtrend
  2. Any break of the value range indicating a reversal unless visible on a higher timeframe (like D1 or higher) must be taken with a grain of salt.
  3. The trend hasn’t changed, no higher highs and higher lows

If we were patient, which a lot of people are not, we would have been able to spot how price is dumping back into the range and falling back below the weekly resistance level. Another indication of momentum slowing down would have been the multiple H4 inside bars after the “breakout”, all of them being unable to continue the rally. This is once again the point where the HTF trend still matters more than a short-term rally.

H4

As time goes on price continues to retrace deeper back into the range creating fresh supply on its way down.

The question now is what can we do with this information ?

The HTF trend still favours shorts over longs but small bounces within the newly developed range can still be played as long as the value high and low are respected and especially the mid-range.

We know price dipped into the previous grey box and rallied away from it. Now it would be logical to assume that buying in this area is still favorable, but it isn’t. The wick into demand is an excellent swing point for people to put their stop loss orders right below. Meaning if price returns to this area a deeper retracement is likely.

The next logical area of interest is the H4 consolidation around 7160. But I will dive into that matter a little bit later on.

As price continues to go lower we see some consolidation on the D1 level and price doing the minimum pullback into the S/R flip at 7.2.

Price closes bearishly and continuation can be expected at some point.

H4

As price goes lower over the weekend a gap in the CME futures chart has appeared. We all know by now the likelihood of these gaps being filled has risen. But not only that, there is a fresh H1 supply zone right around the CME gap which can be played.

Now price returns to our first area of interest. It’s pretty straight forward from this point. If the grey box breaks and price closes below it, it is likely to go lower and take out the swing-point around 6.8.

H4

Given the higher timeframe outlook shorts are still being favoured at this point. The macro downtrend has not changed. If you are a daytrader those small bounces can still be played though but it all depends on how someone wishes to approach such ranges.

H1

As we zoom in on H1 there is no evidence yet that price may likely reverse at this point and therefore we must wait once again.

H1

Also keep an eye on following structural elements in the chart above.

  1. A series of lower highs indicating bears being in control
  2. Lower highs right below a supply zone
  3. Price dipping into a pivotal area
  4. CME gap
  5. Price not breaking the pivot-area

This leaves us with the assumption after the bullish SFP on H1 in the chart above that a sweep of the buy stops of late shorts and a potential return to the CME gap is more likely than price continuing going lower. In a more fanciful described way: Liquidity is above and not below at this point.

All in all this leaves us with two options:

a.) Either punt a long and anticipate a move back above the series of lower highs and short a breakdown later

b.) Or place asks around the CME gap

M15

It is often not unusual that price breaks a level of support as in the chart above the D1 level, consolidates for a short period of time and than immediately reverses. The same works vice versa, too if you remember the H4 breakout above the weekly resistance level from the beginning of this article.

On the M15 timeframe we see how price takes out the lows and than immediately returns back above support and thus reclaiming support indicating a possible reversal being in play. Given the higher timeframe context a sweep of the lower highs as depicted in the charts above is now more likely again. The invalidation level is below the recently taken out lows.

H1

If you were long, taking profit at any of the levels e.g. the red box, weekly resistance or the H1 supply (grey box) would’ve been a good idea. Once again, remember the macro downtrend has not changed and we mustn’t anticipate a break out of the range. Either to the upside nor to the downside.

H1

We now fast forward since there is a lot of chopping going on. What’s evident though that the weekly resistance is still acting as a strong pivot-level and continuously rejecting price from advancing further higher.

The wick into the CME gap can be viewed as an anomaly in my opinion and therefore can be ignored as a swing-point. It only indicates sellers being in control. Keep an eye on the grey box though as price grinds higher.

H4

The more price action develops the more clear it is that bullish continuation from this point onward is not likely. The last coffin nail in this particular PA is the H1 rejection and SFP into the H1 supply (grey box) taking out the two previous highs and closing way below.

H1

Following the H1 rejection price grinds back towards the approximate mid-range of the value area back into demand where a triple of equal lows waits to be taken out.

H1

Once more we fast forward and as evident on the chart below there is one last attempt of bulls in the grey box to push higher but the candle closes below the previous candles and thus bearishly.

As you may remember from earlier the swing-point (A) is not particularly an area of interest. I also mentioned the loss of support and thus the grey box is likely going to be an indication of continuation going lower. But we mustn’t forget where price is going to. The major blue box is still macro support and only if it has been repeatedly tested or broken we can anticipate a break. Support until proven otherwise. Thinking demand is dry is ill-advised at this point.

Our focus now should be on the second swing-point (B).

What is price going to do here?

H1

Finally price has arrived and indicates a potential reversal by printing a H1 bullish SFP in macro demand. This is basically the same thing as I talked about when price has arrived at 7.1 in the grey box demand area.

Price takes out a low and immediately reclaims the level of support. In order to make this sound more fanciful again: Liquidity rests above the lower highs. Plus there is an untapped H1 supply zone (red box) above.

But Sir, why isn’t the supply zone at 6.8 not a good TP area or a potential short opportunity?

Simple:

a.) Price in macro demand

b.) Price took out a major swing low (B)

c.) Immediate retest of resistance is not bearish, there is no time and space between the level itself and the retest

And thus taking profit at either the grey box, D1 level and/or in the H1 supply (red box) is more likely.

H1

Switching back to the H4 timeframe and enabling volume we now see there is strong momentum behind this H4 candle. Yes, price is stopping at this irrelevant supply but remembering the higher timeframe context from where price rallied away from, fading a short here is unlikely to work out.

H4

D1 level serves as resistance, taking profit at any of the higher timeframe levels is never wrong here. Macro downtrend unchanged.

H4

The weekly close and weekly SFP

Added two more HTF levels that may help us derive directional bias on intraday.

W1

Since we have a major swing-high and swing-low I also added the 50% mid-range level at this point further helping us deriving a directional bias on intraday.

D1

Take a note of where the weekly levels (charts above) are. These levels usually give clues for “if this, than that” situation and further aids anticipating breakouts or where important support and resistance lie.

We can now see that the mid-range has a lot of confluence with all kinds of things here.

  1. Pivotal grey box
  2. 50% mid-range level
  3. Weekly support (violet)
  4. (Yearly open)

Meaning if price stays above the mid-range the likelihood of a retest of the range high and in this case the weekly resistance level is higher.

H4

Fast forwarded price rallied once again into weekly resistance and gets rejected followed by a H4 bearish engulfing. The major downtrend is still unbroken. Rallies are still for selling.

But more interestingly notice how there is a H4 supply turned into a “breaker” right at the weekly support level (blue). It’s also quite noteworthy how much time price has spent on the mid-range and sell-stops possibly accumulating below the grey box.

H4

As price fails to close above weekly resistance we grind down towards the extensively tested mid-range. On the way down supply zones are created and can be played for scalp shorts (grey boxes). Take note though which supply zone has been tested which not — probability enhancer.

If we go all the way back to the very beginning of this article you will see some similarities. Look where an imbalance and thus a demand pocket has been created (grey box 6.9). So there are a couple of confluences here:

a) Breaker

b) Demand pocket

c) Weekly support level

H1

Once again we fast forward and avoid the chopping. Contextualizing the previous rejection of price at the weekly resistance level, enough time and space have taken place in order for this retest of the upper grey box right at the weekly level (violet) being valid. If price returns to the mid-range, after being extensively tested a break is now more likely.

H1

I now added the yearly open as an additional aid for developing directional bias all confluent with the mid-range, weekly support (violet) and the pivotal grey box.

After returning to weakened support, support gave in and the lows have been swept. Priced dips into the previously mentioned H1 demand pocket at the weekly support level (blue).

H4

If we zoom in we can again observe a similar behaviour which we have encountered earlier:

a) Price breaking support

b) Sweeping the lows

c) and immediately reclaiming support afterwards

M15

Once again leaving late shorts in awe and sweeping their buy-stops and magically returning to fresh supply and returning back above the mid-range and yearly open.

H4

At the time of this writing the range remains still intact. Support and resistance are what they are until proven otherwise.

One last thing before I finish writing this article:

There is one remaining supply zone which has not been tapped (around 8k) with a swing-point untaken. It’s often advised to rather wait for confirmation before placing any blind asks at a level. It’s not totally impossible for price to rally higher in an extensively over exaggerated move and later pullback into the range below again.

H12

Conclusion

I) Do not anticipate a break of support, resistance or the midrange until there is evidence the level has been repeatedly tested and weakened

II) The macro trend remains valid until proven otherwise

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*Note – Originally posted on Medium.

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Alex Smith
Alex is the Founder of The Daily Chain and has been in the space for just over two years. Fascinated by the community and everything that blockchain has to offer, Alex dedicated himself to creating content and contributing back to the industry.

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