This week I will briefly discuss 'absorption', and more particularly 'potentially bullish absorption'.
From time to time price will move sideways, in a manner which can be identified the buyers attempting to absorb the supply coming from sellers. When Successful, this is generally seen as a potentially bullish event. In a nutshell, there is usually a 'pressing nature' towards the upside, with relatively narrow spreads, and a clustering of closes. Sometimes there will also be threatening downbars, that look just like they will fail, and price will breakdown.....but instead price reverses, and the grinding towards the upside continues.
It also needs to be pointed out that at certain times, the sellers can be the ones absorbing the buyer's demand (most particularly when finally closing positions near the end of a selling event, and also when setting up new short positions - this is fairly regularly seen in the futures markets, when prices are generally trending lower, and it happens most often during the little counter trend rises in price).
When this happens, instead of price grinding higher with narrow spreads, mid to high closes, and a pressing nature to the upside, this time price is often seen with narrow spreads, repeatedly closing mid to low on the bar, with no positive responses to the upside (when they may be anticipated or are expected), and a slowly diminishing price (almost like the mirror image opposite to bullish absorption).
Both can be hard to be sure about at certain times, and can cause quite a bit of angst (if you hold a position), while waiting for the chart to resolve, and show its true intention.
Below is typical example of bullish absorption, which took place between two relatively close potential resistance levels.
As can be seen, price runs up to the first line with intent, gaps over it with a widespread upbar, then begins the absorption process, which goes on throughout the region between the lines as price grinds higher, and once completed, price accelerates away again.
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Below is another example, which occurred as price pulled back from a previous high, and formed a low
