The Importance of Absorption at Price Levels

As we all know crude oil has been extremely weak and trading lower almost every day. The $30 handle has been a key target and common level to watch on twitter and in other media. Well, on Wednesday (Jan 12) we got to witness it being tested, but more importantly, we go a fantastic example of "absorption". Let me explain.

Absorption is the process of excess selling or buying taking place at a single price or series of prices but being absorbed by resting orders.

Absorption is first and foremost the result of willing buyers or willing sellers at key levels. They absorb excess supply or demand and often times create a stopping point and cause the market to test in the other direction. The Footprint chart makes this easy to witness and take action upon. Absorption orders are very often present at key levels and confirm the importance of it by adding liquidity in the form of resting orders. Think of this however it best makes sense to you, but here are 2 examples. One buying and the other selling.

Buying Absorption - This is where large resting sell limit orders (sometimes in the form of iceberg orders) absorb excess buying.

Selling Absorption - This is where large resting buy limit orders (sometimes in the form of iceberg orders) absorb excess selling.

Absorption happens every single day in all markets but some are more important than others. Some occur at intraday swing levels and while others are often present at key tops and bottoms on longer time frames.

A good real world example occurred on Wednesday, Jan 12, 2016 in crude oil. This example shows absorption in the form of a 1500 lot crude oil order that had been present in the market for a couple of hours. It was tagged a few times and the market bounced. Then the market came back, filled the order entirely, and triggered a bunch of sell stops placed just below it and at the key $30 level.

1500 Lot Absorption
1500 Lot Absorption
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