Yesterday morning, we called out that bears had a shot to take control in the markets if SPY traded into the 415 range. Here is a snippet of the call out…

“Spy bears may allow price to climb right into the supply zone before they take over. If bears overpower bulls in the 415.50-417 area, then bears could retest back into the 390’s to retest the trendline support. Demand zone in the 3XX area.“

This morning, in the premarket, the SPY bears took over once SPY hit our daily supply zone (red zone).

So, how did we know that was where the sell would begin?

Supply and demand.

Look at this daily on SPY.

The red zone is the daily supply zone. Often times, people don’t fully understand what these candles are made of. Of course, candles and price action are simply buying and selling. But what is often overlooked is that every candle is simply made up of filled orders.

Think about big institutions… Institutions are trading millions and millions of dollars worth of lots. No matter how liquid the market is, the institutions orders are so big that they can’t get filled all at once.

Look left. You can see where the zone starts that we had a massive red candle. Odds are, institutions had working orders to sell at that same level. Once price clipped that zone, the institutions were able to get filled and close positions leading to selling.

The same process works for demand zones. Having a knack for reading supply and demand zones using candles can help find reversal spots in the market like it did this morning. Supply and demand zones can be used on all timeframes.

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Have a great week!

–Dylan