The Path of Least Resistance

Let’s continue our discussion on supply and demand. You can read our previous posts here and here.

1) If selling has decreased substantially on a down move it’s a sign that sellers are exhausted. Supply has waned. The market will have a tendency to want to go up.

2) If buying has decreased substantially on up moves, demand has waned. The market will tend to want to go down.

So, it will take an increase of buying on up days to make the market go up, and an increase in selling on down days to make the market go down.

These simple concepts help us to understand the path of least resistance.

Have you ever noticed that Bull moves tend to run for longer yet at a slower pace than Bear moves that tend to be shorter but at a faster pace? This is because during Bull moves, traders take profits which creates regular periods of resistance. Thus, price action ebbs and flows higher.

The smart money doesn’t buy into resistance. They take the path of least resistance. To do this they create gap opens, inflections, massive shake outs, or they may even cap markets so they move sideways for a period of time to force traders to sell through impatience.

In contrast with faster moving Bear markets, the smart money offers no buyer support, and is where many traders refuse to sell in the hope of a recovery taking place.

This reflects the fact that most traders don’t mind taking a profit, yet stubbornly refuse to take a loss.​​

By refusing to sell during bear markets (and accepting a small loss), these traders become what is called ‘weaker hands’. It is generally right on the lows when these ‘weaker hands’ are finally shaken out, when the pain of losses can be endured no more.

So, work with the path of least of resistance.

In bull markets ride trends rather than selling for small profits.

In bear markets accept small losses before they get out of hand.

Not sure what the difference between a bull and bear market is? There’s a great explanation here.