Things that used to be thought of as magic are now explained as science. Mental illness was thought to be evil spirits and a rabid dog was considered a werewolf.
How were these falsities conquered? Education, discovery and science helped enlighten people as to what was real, thus removing the veil of the unknown.
Uncertainty and fear of the unknown has scared humanity forever, so why would today be any different?
There is a lot of uncertainty in the financial markets today. Uncertainty around presidential elections, interest rate hikes, terrorist events, monetary policies and the list can go on and on.
The big question is, what does all this uncertainty do to the markets? As we have seen for most of 2016, the markets have not been very volatile, until a news event occurs.
This lack of directional conviction by the market in general, as well as the fear generated, causes extreme reactions to news events.
News serves as a way to drive price into areas where buy and sell orders have been accumulated, but the orders themselves are more important than the news.
Our most recent was the announcement on Friday of the FBI reopening the Clinton investigation.
This is not meant to be political commentary in any way, but the violent move the markets reacted with was indicative of unknown market volatility.
So, was the news truly the catalyst for this market movement, or did the news just serve to move the market into an area of supply that already existed?
Notice in the above picture that in the Online Trading Academy MasterMind Community daily update we identified a supply level in the ES (S&P 500 futures market) at 8:00 AM.
How did the charts tell us four hours before the news was released that price would fall on the news announcement?
Simple: It didn’t. The news announcement happened to hit at the time price was in an area that had previously shown to be supply.
Supply is simply an inventory of unfilled orders that caused price to move the first time around. Think of the area shaded in yellow as an area of balance, where buyers equal sellers.
One price leaves the yellow shaded area, the buy orders in the area had to have been exhausted in order for price to fall from that area of equilibrium.
The next thing to remember is that only banks and institutions have enough fire power to use up all of those buy orders, and that their remaining sell orders will have an effect when price returns.
There are no boogeymen, there is no need to worry about things going bump in the night.
Supply and demand is what causes real market movement and once you learn to identify real supply and real demand on a price chart, uncertainty in the market goes away.
There will never be absolutes in trading and investing, but the power of true supply and demand will give you confidence to weather the storm of the unknown.
Originally published on Equities.com.