When?
A test of supply usually follows recent market weakness.
There is strength in the background - i.e. large traders anticipate higher prices in the future.
Why?
Large traders "test" to see if supply is exhausted. If it is, there will be no resistance to their buying, during Markup.
How?
A test for supply involves rapidly marking prices down and watching the response.
If supply is still present, small traders who are long will panic and liquidate their positions.
When small traders sell and large traders stand aside, relatively low volume is seen on the vertical axis.
If supply is exhausted, a low volume response (small speculators) will occur. A little value-buying pushes the close off of the low.
What's It Mean?
A "successful" test of supply means the mark-down ("test") found few shares left to be sold. This sets the stage for large traders to mark prices up (after they've accumulated sufficient supply) ...without fear that they'll have to buy their way up through additional selling (aka "resistance") during an up-move. The large traders are successful if they scare the shares out of the small traders.
This also allows the large traders to buy the supply at a discount. Once they've got the market cornered ...i.e. own the supply ...they can create demand by simply marking up. Small (breakout) traders see the rally taking off and fuel the up-move.
A "successful" test of supply is thus a sign of strength. (...when it follows recent weakness in a background of strength)
Summary: A successful test of supply is when Price hits a low and backs up a bit and smart money want to see if there are more sellers before they mark price up (less resistance). So they first mark down the price very fast to scare little guys into thinking it is selling off(low volume). Once they see no big sellers they will mark it up so fast that noboy can catch it and the price return to previous level often left a long tailed candle in the process. Now they are ready to move it higher! When u see this .. u jump on the train with the smart money!!
