Volume Spread Analysis

STOPPING Volume


Apologies for the pause in the posting..got busy many things … as usual ..

Now we will move further. The next VSA indication we will discuss is called the Stopping volume, also called absorption volume.

Normally in a down trend you will see a down bar with high volume bar closing on the upper side. This is called a Stopping volume. This indicates that the SM is absorbing all the stocks. The SM has decided to start the game all over again and have decided to stop the down tide and start accumulating. As a result the stock will soon see side ways movement or go into a long accumulation phase. In effect the stopping volume or absorption volume indicates that the long bearish move is likely to end soon.

An Ideal Stopping Volume bar will be down bar with high volume and closing near the top. However most of times you would see the close on the upper half of the bar.

Stopping volume occurs after long down trend. Stopping volumes are basically alert to the impending reversal.

Next we will look another indication of strength called a Reverse Upthrust. Users of TG will not find this in their software. However I do find it a useful indication.

Just like the Upthrust bar we will find in a bearish move a High volume wide range up bar with the low chartering into new lows and the closing will be near the high. This is a good sign of strength returning and you find the trend reversing almost immediately.

The reverse Upthrust is rare and is found rarely at bottoms. Finding the bottom is more difficult than finding the Tops. Most of the time the bottoms will see stopping volumes, some sideways moves and multiple tests before we see a reversal of the trend. It is also common to see consolidation bases at the bottoms.

Any high volume wide range upbar in a down trend would indicate strength. However these kinds of bar can be seen any where in a down trend. It could appear before the temporary bounces / retracements during the downtrend. The difficult lies in the recognizing the strength returning after the bottoms.

I am quoting a nice explanations by tech/a on the above question.

We hope to hear more from John who is very knowledgeable on VSA.

NO SUPPLY BAR

Next Indication we are going to look at is called “No Supply”. As the name signifies this bar indicates absence of supply and indicates strength.

The No Supply bar is a narrow range low volume down bar closing in the lower half. The No Supply bars are found in the early Bottom reversals and indicate strength. It is also common to find these bars in an up trend which are indications of continuation of the trend. They would also be found on consolidation bases.

A No Supply indication has to be read in context with background. At bottom reversal areas they indicate there is no supply available. Then the SM gets ready for mark up. Hence they indicate strength especially if they appear before/after test bars.

During up moves a No supply could indicate non participation from SM. IMHO this is one of the difficult indication to interpret.

SUPPORT & RESISTANCE


It is widely believed that SM respects the support and resistance areas.

Before we proceed with Support and Resistances with regards to VSA let us look at some basics about support and resistances.

The general practice followed by most of us is to draw lines from previous swing Highs and Lows (or high and low pivots). Once these lines are they are taken as Support and Resistance lines .. I repeat….LINES… IMHO this is one of the basic folly we make… The question we ask here is “How can a single price act as a Support or Resistance Line ?” It is like assuming that in case of resistances there are a huge numbers of people holding the stocks at this particular price and early waiting sell.

A more reasonable assumption would be that there are many holding the price at and around last swing high. So there would be a area or a zone of supply/Demand rather than a single price. In case if the last swing high was an Upthrust bar the whole range off the bar could become a supply rich area.

The point here is that not all swing Highs and Swing Lows offer Resistance / Support.
A swing high can be considered as a resistance only if the price reacts at that level. Till then a swing high remains a swing high. Same is the case for the Supports. Swing lows become swing lows only if the price reacts at these levels

Enclosed is charts explaining this concept..

Please feel free to express contrary views if any… More on Support and Resistance Later

Just an example of a profitable trade.... going short on a down bar after a upthrust...

An important thing to note here is that the Resistance areas do not represent large supply waiting to be dumped. In the same way the Support areas do not represent a huge demand waiting to lap up all the supply coming in.

It is better to consider the resistance areas are zones where selling pressure increase and support areas represent zones where buying pressure increases.

Now the question is what Resistance and support has to do with VSA? As mentioned earlier the SM generally give due respect to the Resistance and Support areas as they represent zones of Selling pressure and Buying pressure.

In general increased volume with increased spread as the stock approaches a resistance area is a bullish sign. Falling volume and decreased spread would mean that stock would be stalled at these areas.

In the same way decreased volume and spread as the stock approaches support area is sign that the stock would take support in that area and reverse. Increased volume and spread would indicate that chances of the stock breaking the support are more.

If Resistance areas are crossed with high volume it is a sign of bullishness and if the crossing is with low volumes caution is advice. In the same way if supports are broken with high volume it is a sign of bearishness and low volume crossing should be viewed with caution. Going short on a low volume break of support could result in a bad trade.

The SM often attempt to push through the Resistance areas with a huge volume. These are clearly evident on the charts in terms of high volume wide range bars.

In general it always pays attention to resistance zone even if you are using you own trading systems. When “Buy’ signals are generated near resistance zones one has to be careful.

TREND LINES

Next we are going to look at trend lines. We all use Trend lines and trend line breaks to decide reversals. We will look at trend lines with respect to VSA.

The general belief in TA is that Trend lines offer support in up trends and also act as resistances in downtrends. We will not go into the details of why and how of this belief. Instead we will look at the how volume and spread can give us clues whether the trend line will hold or break.

For example we will take an uptrend. When the stock retracts towards the trend line, small spreads and lower volume indicate as the stock approaches the trend line indicates that the stock is likely to be supported by trend line. Higher volumes and wide spread indicate a probability of a trend line break. Trend lines are resistance areas and effort is needed to break the trend lines. Wide spreads and high volumes are indications of this effort.

Many times we will see the SM absorbing the supply near trend lines. This is a bullish indication as the smart money is bullish on the stock and is interested in higher prices. So when there is lot of supply near trend lines they absorb the supply to keep the prices above the trend line.

Let us look at an example with a chart



A) We can see that the volume is decreasing and the spreads are narrower as the prices retrace towards the trend line.

B) Here the volume is increasing as the prices approach the trend line. This would suggest increased probability of a Trend line break.

C) We have a bar with increased volume and closing near the low. This bar indicates that there is increased supply. The next bar is an effort to Rise bar. This would mean that the SM is interested to keep up the price and they have absorbed the supply on the previous day. Entry / Adds on such effort to rise bars near trend line often result in a good trade.

D) Here the volume is simply tapered off. There seems to general lack of interest on all sides. (This are area shows a failed test and no demand bars indicating a general weakness). However volume came in near the trend line and stock is again going up towards the right edge.

Reversal and Retracement

One of the difficulties we face when analyze prices is determining whether the stock is going through a reversal or just a retracement. If we assume that a retracement is in progress and it turns out to be a reversal we end up giving away too much. At the same time if we assume a reversal then we would be out of the trade too soon. These apply specially for positional traders.

So how do we get a clue whether it is retracement or a reversal? Following are the basic things one should look at.

RETRACEMENT

1. Lack of volatility
2. Small spreads
3. Decreased Volume

REVERSAL

1. Increased Volatility
2. Large spreads. Especially Effort to Fall bars.
3. Increasing volume.

The simplest thing we can do is to draw arrows for the stock movement and the volume. In retracements you will the arrows are in the same direction. And in case of reversal the arrows will be in opposite directions.

Just enclosing an example.