Supply and demand imbalance shifts are regular blood flow to any market. A key aspect to focus on crucial supply and demand shifts is the consistency of symmetry and the density of supply or demand level. Avoiding trying to find substantial sup/dem shifts around single highs or single lows, or around trends, as all those will yield lower accuracy. For higher accuracy key is to focus on specific dense structures where the structure has been in development around a similar price level for a while and formed multiple lows or highs at that area ( for example, 2 hour of structural development on a 1-minute intraday chart). Once that dense demand/supply area is breached, it will create an often strong supply/demand shift that will keep fueling further move due to cascading liquidation orders. It will also present potential bounce/rejection level if price retests that major taken demand or supply level. Many bagged / underwater positions will try to get out at their first opportunity for break-even exit or exit with as little loss as possible if price retests such major level again, creating the "rejection" effect on a retest.
Thus, those dense supply and demand levels often create strong liquidation moves along with strong rejection moves if retested.
"Get me out of here" concept of underwater trader:
Underwater level of supply or demand
The concept of "underwater" stands for a level of demand or supply that has been left behind, sort to speak. For example, imagine if you had a market with many sellers of groceries selling the same fruit for a similar price, and all of a sudden, you have supply shock where vast amounts of the same fruit hit the market from the unexpected prominent seller. In such a case, the price would start dropping very quickly.
Many sellers would thus be underwater as they would soon be selling at way lower price or maybe even a loss, but if the opportunity presents where for some reason decent demand shows up and pushes prices to where their initial selling price was (still factoring in that huge seller is still on the market) then a lot of those small sellers would take the opportunity and try to get rid of their fruit as quickly as possible around that price, because they know it would be potentially unlikely for that demand to be sustained above supply to keep the price where it is if that prominent seller remains present.
In other words, they would jump into that quick price bump head-on and get rid of their supply (bagged position). This is essentially what happens when the major demand level in market price is flipped. If the price retests it, often, it will result in rejection if that initial demand area is very dense and thick in size with many different buyers participating and trapped (not just a single market maker). The above fruit market example is not a guaranteed scenario, just as it's not guaranteed for the price to reject level in traded assets, it's about the expected behavior and how to play it with decent RR (risk to reward).
Symmetry of behavior
The symmetry of behavior is the critical component to look for; without it, the accuracy of defining such supply and demand shifts becomes too much of guesswork, where traders try to predict that every high or low on the chart will serve as a "rejection point" and the price will bounce off it, which if data is collected can quickly confirm to have poor performance rate.
Focusing only on strong symmetric levels where price behavior was consistently bouncing few times at least and has formed clean significant highs/lows around that demand or supply level is the level to focus on underwater rejection play.
All humans are a bit different, but every single human, as much as other mammals are biologically programmed to do one thing well and quick, and that is....to spot the symmetry (many reasons, primarily reproduction reasons to spot healthy female/partner, learning the behavioral patterns of potential predators...etc.). The stronger and cleaner the symmetry is, the quicker it will be spotted by many. This leads to many traders looking and tracking the same levels if symmetry is firm, which is a good thing because once those levels are flushed or rallied from, it will form a significant response from many traders fueling the magnitude of the move (cascade).
Bellow is a conceptual example of level with behavior symmetry+consistency on the right and the left non-symmetric level without density:
To trade underwater bounces only focus on structures like the one on the right side, dense symmetric structure to increase the cascade effect of order flow from breaches of such key price zones.
Stop-loss setting on underwater rejection play
Risk and reward on rejection/bounce trades from those levels are by default pretty good, but the overall bounce rate is not that high. If they reject those levels, it usually happens sharply and precisely with a slight overshoot, which is why there is no need to use very broad stop losses. A trader should patiently wait for the price to come as close to flipped level before entering so that risk is minimized as much as possible and reward is expanded (RR).
Bellow is the conceptual presentation of where a trader could enter a short trade and where to set stop loss on such trade, or at least where to start cutting position in chunks if price reclaims key underwater level. Especially if the price overshoots on high volume, it's time to exit in the loss. This is not a must-to-do guide on how to trade it, it is just how I like to play it. Also should be noted that this is just a micro play. By no means should trader trade random charts and underwater rejections; this should be used along with additional variables and an overview of the asset (catalysts, strongly trended assets....etc.).
The concept above is outlined for a short trade, but the same principles apply for long trade as well, just the structure should be inversed.
The concept might seem familiar to many traders who heard before about the "basic support turns into resistance" concept, but the reality is that many traders force single highs and lows into expectations that those have some high chance of delivering bounces on random assets, at random locations which are low yield on performance rate.
In small-cap stocks land, often a short trap is going to be formed around such a level if it is reclaimed, which is why underwater levels of dense structures are good to play both sides on, especially if the asset is manipulated to the long side.
Examples:
Dense demand area on TSLA example, washed out, tried to bounce but got rejected each time on a retest of underwater demand until it finally flushed.
An example on the image below is the dense demand area on ticker EMR, which is breached very slowly on thin volume and then re-tested with few consecutive rejections. Light volume wash of demand area is not necessarily a bad variable if one is short, as it ensures that likely more longs are still sticking in an open position and have not yet panicked out of positions (which makes them more likely to sell once they get to break-even opportunity and contributing to rejection effect).
A similar example to EMR above is the example below on gold (XAUUSD), but with a stronger wash. The retest of the underwater level was on a slow-moving bullish pullback, which is a good variable. It indicates that buyers are weak and need a lot of time to retest the broken support, while sellers are much faster at delivering the flushes, indicating supply in control. Negative variables out-weight the positive ones in such cases, which is good for the short side, and if perhaps one is trapped in a long position, those variables equally point towards the fact that the trader should possibly consider exiting.
A similar example below on EURCAD, where the major demand structure gets breached to the downside. On a retest of such level, there are two rejections before the price manages to reclaim the critical underwater demand level.
Another example on ticker GHSI, where the critical demand level gets retested after the initial breach, delivers several rejections as buyers cannot absorb the supply and push price higher.
Very symmetric demand levels are ideal to trade underwater rejections because it is much more straightforward for a trader to know where to enter a position and where the critical rejection behavior should occur—the cleaner the symmetry of level, the better (all lows positioned around the same price).
Time decay
Time effect also plays a role on those bounces, and generally, for bounce trade, one wants to see those levels retested as quick as possible. For example, if the last high/ low in structure took 50 candles to develop, then the retest should not take more than 200 candles, if it is in a higher ratio than that, the chances of bounce decrease because the longer the price stays away from that flushed demand level or rallied supply level, the more positions will slowly eventually unload before the price gets to retest it again. Or, to put it in simpler words, the supply effect diminishes as the time progresses further when it comes to the retest/rejection effect around a specific underwater demand zone.
Bellow is a conceptual example of time decay after the demand area is washed out, and the reaction-rejection impact, which decreases the chances of the zone to bounce over time:
The new retests are usually the best (those that come quickly after the major level is turned underwater) because it ensures that many bagged positions are still present and not yet liquidated.
The shorter the move from the washed demand is, the better, if the move from washed demand is too extended before it retests it, chances are many underwater longs have already liquidated (the pain effect of trapped traders increases the further price drops away from demand level, those that are long, increasing the chances they will sell out).
Placing the variables in the correct context and weighing them against each other and the pain threshold of underwater positions are two main components, if a retest is too quick, then underwater traders might not liquidate and hold with the hope that price will further move above their break-even price. If retest takes too long, then many have already likely liquidated. There is a balance in between on how fast, good retest-rejection should set up.
Example on ticker SEEL below, where the critical demand level gets washed quickly on solid volume and is then retested relatively quickly within 20 candles. A quick and sharp wash from broken support will indicate to trapped buyers that supply is firmly in control. Further rejections (and tunability to reclaim such underwater level) further reinforce such view, making it more likely for such buyer to sell out and contribute to the supply effect.
Example on ticker MBOT below, where key demand is washed out, then retested three times followed by rejections.
Those underwater supply and demand levels work as good rejection levels mainly on assets that trade with overall balanced market participation. If the asset is rigged/manipulated by a single market maker, those levels will be easier to swipe through, especially micro-float stocks.
The more volume that trades inside the structure, the better rejection play might be later once it is retested because the more underwater positions are likely to bail out on retest.
Bellow is a conceptual example of how good underwater rejection structure should look and its variables. Best underwater rejections will always be where a structure is set against the primary trend (bearish rejection in structure on an uptrend).
The denser the demand or supply level and the more volume traded, the better for potential rejection play. The level also has to be symmetric and consolidated.
Underwater supply
The examples and explanations are mainly for underwater demand in this article, but the same rules apply to underwater supply (shorts underwater), just the structure is inverted.
Volume on initial wash
If underwater demand or supply is significant in size and volume (plenty of trapped traders) , it could potentially reject the price on a retest. Now by no means that this is what will always happen. In many cases, there will be no rejection, in the end, it is tough to tell how many traders/positions are underwater at a specific dense supply and demand level, even if one is glued on Level 2 / tape or analyses the volume inside price structure carefully.
A good practice is observing how much volume trades on major breakdown or breakthroughs and how much volume price trades back on the retest leg. For example, once the main demand level is washed, does it trade a hefty volume on that wash? Because if it does, then the chances of many traders still being underwater (longs) are less likely. The most optimal scenario is where on the initial wash of demand there is little volume traded, this increases chances that a lot of underwater traders are still holding and not yet liquidating.
The example below of smaller volume on initial wash for a better chance of underwater rejection:
If the structure is under distribution and not accumulation (in an uptrend), then once washed out, chances for rejection are smaller because there were more sellers than buyers participating in the structure in the first place. Unless one is a forensic expert at reading the tape, this is hard to tell and often much easier to say after the fact. Trading is always a balance between assumptions vs. hard research data.
Conclusion
Those micro setups require a lot of practice with trial and error, listening to variables of Level 2, price behavior, and all the rest written above and above all patience for a trader to aim for the best possible entry right around key underwater potential rejection area. Overall it is solid method to have in the playbook because such opportunities are present across any market.