Volume Spread Analysis

[karthikmarar]

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

 

[karthikmarar]

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

 

[karthikmarar]

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.

 

[karthikmarar]

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.

 

[karthikmarar]

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.

 

[karthikmarar]

Friends

I have covered the basic elements in Volume Spread Analysis.

When I started the thread I was hoping for an active discussion which would eventually lead to a better understanding of Volume spread Analysis. But then the thread turned out to be a disappointing monologue.

There could be many reasons for this. VSA as a concept has not caught the imagination among our members. Or is it that most of our members have not crossed the Indicator stage. Or is it that the concept is a bit far fetched for our members.

On the positive side this thread did attract many from different parts of the world. Since this was a restricted thread they could not post and many conveyed their views by PMs and I did learn a few things from them.

Then the time has come to wrap up this long monologue. I do hope this did help at least a few of our members..

Warm regards

Karthik

 

[rajaram.dilipkumar]

friend , just started posting again this week after 3 week break from traderji due to pre-occupation with important assignments hence could not participate in this thread .... just yesterday took a print of the charts and explination for the patterns given by you ...
pls continue your good work as there is a scarcity of educative stuff in the forum these days and this thread has filled the void .

 

[lalpar]

Karthik,

I have been following your posts and understadning each and very chart..Only thig is I am not posting but u can always see a THANK YOU for every post of yours...

Keep Continuing your good workkk...


One more thing:Vishal Retail...I had asked a quetion abt in in your thread TECH VIEWS ..do let me know your analyisi on the same

All in all yesterday your post of retracement or reversal was observed by me and based on that I will take a position in NIFTY..Dedfinately this thred is helpful for me so please continue to post...

 

[karthikmarar]

Rajaram and Lalith

I will continue posting some example charts in order to provide a better understanding of the concepts of VSA.

Afterall I have to atleast give back a little of what I gained from this great forum.

Like Sint always says... even if one person learn something it is worth all the effort.

regards

karthik

 

[karthikmarar]

TREND CHANNELS


Next I will touch on the concept of trend channels. Tom Williams briefly mentions this in his book. He calls then Trading Ranges though I prefer the term Trend channels as in we will find the stock is actually trending up or down when we look at from a wider view. This is actually different form the horizontal trading ranges where the stock movement is sideways. Of course I have taken some deviation from his concepts.

Many times you will find a stock moving in a upward or downward channel. We can draw upper trend lines and lower trend lines and they would almost be parallel. Tom Williams divides this channel into upper quarter and lower quarter and most reactions happen in these quarter. He also calls area above the upper trend line( or supply line) as over bought zone and the area below the lower trend line as over sold zone. The middle area is where we can expect the stock to move anywhere.

But I go a step further and I draw a middle line. The interesting observation here is that it is around this middle or mean line where most we see a conflict or tug of war between the bulls and bears happen and many reactions happen around this line. I call this the Conflict Zone.

From a VSA perspective we will find support or strength coming near the bottom trend line. We will also see weakness creeping in in terms of upthurst bars or pseudo upthrust bars near the upper trend line. In most cases the Trend channel is wide enough to give some nice trade opportunities.

Here is n example of downward trend channel