Supply and Demand
The relationship between supply and demand plays an important role in our study of rolling stocks. In fact, the
channel that defines the support and resistance levels in our rollers is nothing more than an expression of the supply-demand relationship. For instance, in the figure below, we have two diagonal lines, supply and demand. The supply line shows the number of sellers willing to sell at a given price.
The demand line shows the number of buyers willing to buy at a given price. Quite simply, as the price increases, the number of buyers willing to buy at the higher prices decreases. In the chart below, resistance occurs where the price bumps the ceiling because there are no buyers willing to pay the higher price. Support occurs on the left side of the supply line where sellers are no longer willing to sell at the low prices. The position of these lines changes continually during market action, reflecting the changing opinions and expectations of investors. The chartist looks for signals in the price and volume relationships to discern the direction of the changes.
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In this figure, when the price equals $23, there would be about 5 willing buyers and 17 willing sellers. Which direction do you suppose the price will move? The dynamic of free market activity is profoundly evident in this example.
Trading volume is the primary indicator of supply and demand. Used with the price charts, volume data can help us look ahead to where the price is going.
If the volume is heavy when the price is rising, the rise is likely to continue.
However,
if the price is rising on declining volume, it will probably not continue its rise for long.
It is from the combination of price and volume that all technical indicators derive their value. We must add timing to this duo since the charts are all plotted with respect to time.
Fundamental analysis tells us what a stock should be doing. Stock charts tell us what the stock is doing. This means technical analysis can be viewed as a short-cut. The chartist can analyze a stock without plowing through all the fundamental data. It is enough to say, when a price is rising, the market considers its fundamentals bullish. The chartist does not care what those fundamentals are.
