Volume Spread Analysis

Discussion in 'Advanced Trading Strategies' started by karthikmarar, Jul 26, 2008.

  1. karthikmarar

    karthikmarar Well-Known Member

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    Now we come to the next phase in the game plan of SM, namely “Mark Up”.

    Once the smart money has a cornered a huge chunk of the stocks they are ready for the next move. The idea is to jack up the prices so the SM can fill their pockets. Typically you will see the low are getting higher. The closes are slowly getting nearer to the high. The prices are getting higher on lower volumes as there is very less supply. The reactions happen much higher than the support line.

    Then ..the stock shoots through the resistance or supply line with higher volume. For that matter the stock need not exhibit the characteristics mentioned above. Suddenly it can just pop out of the congestion zone.

    It is better to take note on the volume at this juncture. The volume need not be very high at all. Since there is no supply (SM have the majority of the floating stock). If the volume is moderate we should see it coming in strongly soon. Otherwise the move will collapse and stock would return to the base. We should see a large swift increase in the volume in case of a genuine breakout. The stock should be closing near the top. Also too much volume is not good. It would mean too much supply is coming in. Heavy volume with the stock closing in lower half would definitely mean supply coming in. Typically an 150% increase in volume with the close near the top would indicate a successful breakout.

    The breakout is just the beginning. Then the stock moves up in stages. Each stage would be an advance at higher volumes and a retracement at lower volumes. The retracement is mainly due to short term traders booking their profits. The SM also starts the distribution during the retracement. The point at which the retracement stops become important. These should be above the previous retracement stops. In simple terms as Saint would put it the stock is making higher high pivots and higher low points.

    We will also see sideways movement during the up move which would be congestion areas. We need to pay lot of attention to these congestion areas for this could be final distribution areas before the mark down begins. Also it pays to give attention to volume during retracement and congestion areas. Increasing volumes near support line and low pivots indicate problem. If the increase is dramatic then it is time to re-evaluate your position.

    Finally the stock could make a climax run where the price and volume explode. The shorts run for cover and the green horns rush in not to be left out... like cattle rushing into a abattoir. Soon rapid markdown starts leaving the weak money holding the bag and he SM their cash.

    Please do note that here we are talking about more of an idealistic picture. In reality it could be more complex and many a time difficult to decipher. But then practice makes one perfect.

    Just enclosing a chart with similar conditions mentioned above.

    [​IMG]
     
    Last edited: Jul 31, 2008
  2. karthikmarar

    karthikmarar Well-Known Member

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    Trader111

    IMHo it is accumulation. The chart as per my understanding (rather inadequate) of Wyckoff stuff is given here. Of course the spring is missing .. But there are no hard and fast rules here .. are there ?

    [​IMG]
     
  3. karthikmarar

    karthikmarar Well-Known Member

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    Hi Trader 111

    Yes, it is the chart of Hindustan construction company. In post 12, for better visibilty I had zoomed in. In post 16 the past history is shown which makes it clear that we are in accumulation phase. If one looks at chart 12 without the history he cannot be sure whether it is accumulation or not.

    This brings out the important point that for evaluating the congestion zones it is necessary to look at what the stock has been doing prior to the congestion period.

    regards
     
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  4. karthikmarar

    karthikmarar Well-Known Member

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    Now let us come to the third phase in the SM game plan which is Distribution. Distribution is the process where the SM is offloading their accumulated stock at a much higher price.

    It is not very easy to spot distribution. Many a times you will not see any congestion areas. The UP move may slowly deteriorate and start rapidly deciding after a furl of heightened activity. The Wyckoff puritans may disagree here.

    In mark up phase after the stock has run up for some time you will the volume diminishing and the spreads narrowing. The angle of ascent becomes lesser and lesser. The stock trend may even flatten. This would mean that the demand is drying up. The buyers are not willing to pay a higher price for the stock. Also sellers are reluctant to offload their positions hoping and waiting for a better price. It is here the SM slowly start offloading their stock. Much care is taken not to make it visible. Volume is never too high. Prices are support at certain levels so that there is no panic. Here it is important to take note of the volume price pattern and angle of ascent. Too steep an ascent is also a problem. Suddenly you will see the stock dropping down like stone from its high perch.

    It is at the top you will see patterns like H&S and double Tops which are distribution patterns.

    Many times it is hard to maintain any semblance of the uptrend continuing and so a sideways congestion move ensues. The congestion zone will be quite similar to the zone we discussed earlier for accumulation. You will see the price being supported at some support level and being contained within a resistance level. The points to take note are the same ones we talked about in the accumulation zone. Just like in the shake outs in the accumulation zone you will see a shakeout in terms of up thrust bars. One has to be very careful trading the breakout from the distribution zone. If it turns out to be the final climax move you will be left holding the bag. But then the stock may goes for another up move. Here looking for uptrusts and other weak indication becomes necessary. We will be talking about these indications later.

    In the final climax run the stock explodes in terms of volume and price. Like I said before the breakout traders , greenhorns rush in and the shorts will run for cover. Then you will see many Uptrust Bars where distribution takes place with maximum prices. There could be a series of Uptrusts and then.BANG.. the stock drops down like a stone.

    The chart posted earlier shows an example distribution zone and the climax run. The upthrust bars are identified with square on Top of the bar.
     
  5. karthikmarar

    karthikmarar Well-Known Member

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    We now come to final step in the SM game plan, the Mark Down. When the SM has disposed off most of the accumulated stock they start the most dramatic move of crashing down the prices. Suddenly supply comes in plenty overwhelming the demand. The price starts tumbling. The spreads dramatically widen. There is panic selling from investors. But the prices drop so rapidly and most of the investors and green horns that entered late never get a chance to off load there holdings.

    Like the markup phase we will see some rallies in the downtrend. These are more off reactions. Either the SM themselves try to shore up the price for their last bit of holding. Day traders, Value Investors trying to bottom pick and the green horns trying to Average contribute to these rallies. Our friend Saints calls averaging Catching a dropping knife. I cannot find a better description for Averaging. It is better to note the volume during the rallies. You will find the volume is more on down days and less on up days. When the rally fails the average investor panic and start selling and that accelerates the fall.

    It may take weeks for the down trend to reach the bottom. The end is generally indicated by a stopping volume or an absorption volume. The SM may be absorbing the stocks to start the game again. You would find a High volume bar with long spread and closing near the top.

    It is during the mark down phase you will see rallies like the Dead Cat Bounce. Pay attention to the volume pattern during these rallies.

    The mark down phase is the most depressing and cruel part of the SM game plan. By the end of it the SM would be taking delivery of his brand new E class Benz while the average investor is scouting for a buyer for his run down maruti.
    Of course the Markdown phase does offer good opportunities to smart investors who are adept in short side trades.

    But the mark down phase has a silver lining towards the end it offers the smart investors many opportunity to enter into some really profitable trades. We will discuss all these later
     
  6. Czar

    Czar Guest

    So would I be wrong if I say,that in an uptrend generally high volume is bad as it happens after distribution phase to mark up ?
     
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  7. karthikmarar

    karthikmarar Well-Known Member

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    High Volume happens during the early stage of the Mark Up as well. Also SM use High volume to cross high supply zones. So it is important to see if the high volume move is supported by SM and the market in general. How we can infer this? We can do this by looking at the spread and the close. This is just what VSA is about.
     
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  8. CreditViolet

    CreditViolet Guest

    How high is high and how low is low? ;)
     
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  9. karthikmarar

    karthikmarar Well-Known Member

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    Ahh... Sir CV, a valid question. How high is high and how low is low?

    Of course we need to a have a Benchmark. Normally a 30 bar moving avreage suits fine.

    We will face a similar situation on the question of spread. How wide is wide and how narrow is narrow? The problem is more complicated here. During volatile period the average spread is high compared to non volatile periods. More on that later :)

    By the way the landmark :eek: is missing from your post nowadays. why? :D
     
  10. karthikmarar

    karthikmarar Well-Known Member

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    Now that we have a general idea about the SM operation we can step into the world of VSA.

    VSA involves analyzing each bar with respect volume, spread and close. We will ignore the open. Also while analyzing the bar action we will also keep in mind the general background of the market.

    As a first step let us make some definitions. These are elementary and most of you understand this. But for the sake of synchronizing our thought I will repeat these here.

    Some Basic Bar definitions.

    Upbar - A bar would be called a up bar if the close of the bar is above the close of the previous bar.

    Downbar A bar would be called a Downbar if the close of the bar is below the close of previous bar.

    Spread Spread is the difference between High and Low.

    A wide spread Bar If the spread of the bar is above 1.8 times the average spread then we will term it as a wide spread bar. The factor of 1.8 is a tentative one.

    A narrow spread bar if the spread of the bar is 0.8 times the average spread then we will term in a narrow bar. The factor 0.8 is again tentative.

    Note:

    The problem of calculating the average spread is that during volatile period the average spread is high and in non volatile period the average spread is lower. So a bar which could be termed as a wide spread bar (WRB) in non volatile times could become a average or even a Narrow spread bar (NRB) in volatile times. For simplicity sake and to take the discussion forward we will keep the above factors common. At a later stage we can discuss about methods to arrive at better methods of defining the average which works at all times.

    [​IMG]
     
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