Following yesterday’s post on the ES Emini daily chart, I received several emails and also comments on Twitter to expand on the analysis and in particular on the down candles associated with the prior price action, so I have created a detailed annotated chart to explain.

If we start in early September, here we have a five candle price waterfall on rising volume which confirms the increased selling. The very low volume bar was a glitch on my system. Congestion follows before the heavy selling continues with the three consecutive down days and ending with the wide spread down candle on very high volume, but note two things. First, a volatility trigger has been activated with the price moving outside the average true range and hence we anticipate congestion or a reversal. Second, the depth of the wick signals strong buying. However, note the response with the three green-up candles. Volume is falling, so the price is unlikely to go far, a view confirmed by the red candle with a deep wick to the upper body and pivot high (yellow triangle) on high volume. The market then reverses on strong selling, before buyers step in once more. Note all the five candles in the congestion phase have wicks below with the last candle in this sequence a strong signal of buying. But again the rally is weak denoted with the following candle on average volume and wick to the upper body.

There then follows a three candle move lower, but the important point here is the volume. It is average, but more importantly, it is an area that has previously seen high volume on the sell-side. What this means is that the selling pressure is waning – in other words, sellers are becoming buyers and changing their bias to the long side. This is how reversals develop with the selling pressure of a price waterfall being mopped up by the market makers over time. Finally, this is followed by the rally which I covered in yesterday’s post.