Markets have so many factors playing underneath that it is almost impossible to gauge what will happen next. What appeals bearish today may change and appear Bullish tomorrow. Hence, whatever view you have on markets should be based on broader term observations. A session, a day and a week contribute towards the price movement. Each on their own cannot be used to base a judgement.
The way I look at it, Nifty still remains positive. We are just witnessing some volatility which is natural. Market dynamics keep changing by the second and hence we'll review Nifty time and again to check our opinion.
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None of the indicators are leading. Everything lags. This is precisely why I use indicators very rarely. The only "In - Present" indicator is Price. Even Price is not Leading if you look at it purely based on what it does in the present.
Anyway now coming back to your query. MACD and RSI need to be used carefully. MACD is a combination of (26 day EMA - 12 day EMA) and 9 day EMA of the (26 day EMA - 12 day EMA). Hence when you use RSI with it, a default 14 day RSI may not give you a clearer picture. See, MACD is a trending indicator. It indicates long term trend and RSI is relatively short term when you use the default settings. Hence, either shorten the settings of MACD or increase the setting of RSI for it to give you the real picture.
Also remember, indicators like RSI and Stoch can stay in Overbought and Oversold range for a long time. It does not indicate change of trend necessarily. Infact if RSI is above overbought levels for more than 3-4 days, then that's Bullish for the stock. Just read more on such indicators in Tom Demark's book. It will broaden your insight into how to use short term indicators.
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Whatever your trades are, adhere to your stop losses in this market. Whether this is a shake out or otherwise will only be clear with time. Protection of capital is utmost important. Series of small losses can be made back by one trade. Hence, adhere to your stop losses.
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Apart from Fundamental and Technical Factors, something I rely a lot on is Intuition. I think in this thread I have written a post regarding this, just try and find it.
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I am not an expert in understanding a distribution or accumulation pattern. And one more thing is to be noted is that.......... any type of charts have its limitation in understanding the conditions of accumulation and distribution because both conditions looks as good as same in the charts.. Hence the parameter I use to observe it is the play of volume and mainly the understanding of the market conditions and in which part of that are we at present..(i.e. after a fast bull run NIFTY corrected around 500 points last month... Ok.. So the next chance is of a side way market where shorts are covered and further positions are built up according to the sentiments. We have already seen short covering till 6050 levels and then the chance is to test it 5750 or even 5550. levels... In conclusion.. I believe Niftry will trade inbetween 5550 and 6100 this month.)
Volume spread analysis is a new way of looking at the market. It more like the candlestick analysis taking into consideration the volume. However not all the candle stick rules apply here.
The basic premise behind the volume spread analysis is that the market is basically moved by the “Smart Money”. The smart money accumulates the stocks at low prices. Then begins process of marking up the price. Then the “Dumb Money” starts entering the smart slowly. The smart money starts passing the ownership of the stocks to the dumb money. This process is called Distribution. Soon more and more dumb money starts rushing into the market not wanting to be left out of the big rally. Unfortunately the retail traders are the last to get in. Once the process of distribution is complete the smart money starts rapidly marking down the prices and the dumb money are left holding the stock which was bought at high prices. At the end the smart money is much richer and they can again start accumulating the stock at lower prices. The cycle continues.
This one way explains why the move moves are slow and the down moves are very rapid. The process of marking up the prices and distribution is a slow process. It takes some effort to get the dumb money interested in buying into the rally. The mark down process is very rapid as the smart money’s intention is to trap the dumb money. They have to give very little chances to dumb money which is generally slow in reacting to exit.
VSA attempts to read the moves of the smart money by looking at the price, volume and the spread of prices.
..................Traditional approach if Price increases along with higher volume then (+)ve or Price decreases along with higher volume then (-)ve.
It was the era of OBV,in the sixties.(On Balance Volume)
Joseph Granville, creator of the On Balance Volume indicator, insisted on the importance of volume analysis. He exclaims that volume precedes price, and he even goes so far as to argue that volume is cause and price is effect.
Then traders made few more observations on Volume :=
a)Traders must always look at price patterns in conjunction with their associated volume pattern, never alone. A stock may appear to be in a head and shoulders pattern, but the volume pattern must confirm that analysis.
b)Careful analysis of the volume of selling that occurred above current resistance will help you estimate how long a stock will stall at that level.
c)Well-above-normal volume is essential when separating a true from a false breakout above resistance.
d)Well-above-normal volume on the break of a key support level is likely to keep the swing trader from making the mistake of shorting into a deceptive "spring" formation.
e)Climactic volume can occur after a sustained downtrend. The retest of the support level of the selling climax can provide a good trading opportunity if it is accompanied by low volume (as compared to the selling climax).
Like these enters VSA = Volume Spread Analysis (Though the person behind this Tom Williams has taken the concept from a Richard Wykoff of 18th century & built upon it.)
Which Karthik has taken a Gr8 effort to explain to us.(I am personally keen to know)
There is also another New Approach "Profile".
Just a slight clarification for newbies. Market Profile plots Time per Price, while the commonly available Volume Profile plots Volume per Price. Distinction is for conceptual clarity only. after that you can use VP properly to get readings "similar" to MP and use VPOC too.--------------------------------------------------------------------------------
The foundations for volume spread analysis were laid by R.Wyckoff way back in the early 1930s. Wyckoff was supposed to have made fortunes with his principles. Wyckoff stared with a premise that price / volume / Time could provide a picture of the demand and supply from smart money (he called the smart money ‘composite man’). We will come back Wyckoff later in the thread. It would be nice to look at Wyckoff methods time to time as his work is the basic one and others have built on it.
Wyckoff had three basic principles or..say.. laws
Supply and Demand
Cause and Effect
Effort and Result
The current day VSA available in the market still relate to these tenets.
Much later in the 70s Tom Williams who worked with a syndicate (read… Smart money) for 15 years, developed on the Wyckoff’s work and came up with Volume Spread Analysis and later commercialized it. (The critic would say ..why commercialize it, he could have made money himself.. ). Now many more companies offer their own concoction of VSA, hawkeye traders and genie software to name a few.
Tom William’s VSA basically ignores the open of a bar and uses high, Low and Close. This is where it basically differs from classical candlestick analysis. Most commercial vendors claim to use more than 300 indicators to analyze each bar. I have seen that some of the VSA vendors use other indicators though not explicitly.
One thing is certain that the availability of basic information on VSA is scarce. I have come across much discussion on other forums on VSA. However most revolve around commercially available packages. Our intention in this thread will be to explore the basics so that each one of us can arrive at our own convenient VSA analysis.
I know most of you are eager to get straight into the core of VSA. But let us lay some foundations before building the blocks of VSA. First thing is of course to understand a little more about working of Smart Money (hereafter we will just use the term SM to indicate Smart money).
The SM basically moves the market in four phases as follows
1. Accumulation
2. Markup
3. Distribution
4. Mark Down
Most of you may be fully aware of these. Still we will look at these phases more in details as this would help us to understand the SM operation better which in turn would give a better perspective to VSA.
There will not be any demand for something when there is plenty of it available and nobody wants it. As the availability decreases and more people want it then the demand increases. So the first thing the SM does is find something that is available a plenty and cheap. The next step is to create a scarcity of the same and get people interested in it which in turn generates the demand. This is first phase which is Accumulation.
Accumulation is a process through which the SM acquires a large quantity of the stock at the lowest possible price. Accumulation is a subtle, sophisticated and sly process of cornering a huge quantity of the stock that makes the following phases possible and worthwhile. Once a large quantity has been absorbed the number of floating stock reduces and the demand increases. This makes possible the next phase Markup.
Accumulation normally takes place in congestion areas. Congestion area are mostly sideways range bound movements where the stock appears to have no interest to either move up or move down. The SM ensures that the stock is contained below a certain upper level which is the supply area. At the same time the SM also supports the prices above a certain lower line which is the support area. The stock moves within an upper resistance or supply area and a lower support area.
The congestion areas are characterized by Indecision. One of the most important characters of congestion areas is the Low Volume. When most traders are bullish or bearish the volume is high. Low volumes indicate indecision among the traders on bullishness and bearishness.
Ah.. Sounds easy…….. Well the problem is that congestion areas are seen in both accumulation areas as well as Distribution areas ……… oh , Well that is not the only problem………. There will be periods where no one seems to be interested in the stock… the pattern of price movement most of time very similar to the congestion pattern…..
So the naturally the question is how one would ascertain if the pattern is really accumulation in progress……. A little later on this and other congestion patterns…..
So the question was …How one checks if the congestion area is really an accumulation area.
There are a few things to lookout for..
First, the indecision should be quite visible. In other words the volume should be low and quite. No huge volume upsurges. Even if the volume is relatively higher the range between up day volumes and down day volume should be narrow.
Second, the spread of the bars (High – Low) should be narrow.
Third, the volume should shrink near the support line and expand near the resistance line.
Fourth, the stock should be trading in a range for some weeks if not months.
Also you may see some shakeouts in the trading range. The SM would temporarily drive down the prices below the support line in order to takeout the stop losses and panic the weak hands into selling. You will see the stock bounces back above the support line immediately. By this process the SM is shaking out the weak money from the stock. For most of us it is just a failed breakout. Sometime the stock instead of bouncing back would continue to drop if there was too much supply. So trading these breakouts could be tricky.
Also it would a good sign if the stocks trading range is much above the support line.
Normally we would see some of the above signs if not all in the acuumulation area.
There are many other patterns which signify accumulation. Some of them are rounding bottoms, reverse head and shoulder and double bottoms (or “W”) patterns. Each could be explained in terms of SM activity. However we would go into the details now. One thing to keep in mind when evaluating patterns is that it is very important to check the volume pattern as well.
For an example we will look at the chart of HCC where a clear accumulation indication was seen June 2007...
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#10 30th July 2008, 08:49 PM - Add Post To Favorites
karthikmarar
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Re: Volume Spread Analysis
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A few points about the congestion zone we are looking at for signs of accumulation. It is important to look at the history of the stock prior to the congestion area.
A few things to look out for….
Has the stock gone through a cycle of accumulation, markup, distribution and markdown previously? Were there signs of a selling climax just prior to the congestion? If so, the SM are really looking out for making another round.
Or the stock has been languishing aimlessly prior to the congestion zone you are looking at. If so, this area you are looking at is not accumulation at all.
Was the stock enjoying an uptrend prior to the congestion? If so, this could be a re-accumulation going on here.
Was the stock undergoing a minor down trend (after an up move) prior to the congestion? Was there a downtrend without selling climax? Then this could mean there is re-distribution in progress and it may be advisable to look out for sign of distribution.
(If you are wondering what is selling climax.. don’t worry.. we will take it up in detail later.)
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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.
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.
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
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.
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.
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Next we come to topic of volume. CV had raised a valid question on this. How high is high and how low is low? For this we should have a reference volume which can used to compare with the daily/bar volume. The simplest way is to have 30 day/bar moving average of the volume. From the very little experience I have in VSA I feel that the 30 day/Bar simple moving average of volume serves the purpose quite well. We will take it as the stating point. Mike had pointed out another method. We can discuss these further in the thread later as points of refinement after we establish the basic indicators of VSA. Again as a starting point we will define any volume above 1.8 times the average as “High volume”. Volume above 3 times the average would be termed “Ultra High” volumes. Volume below 0.7 times the average volume will be “low volume”.
With these basic definitions we are ready to look at some of frequent Indicators (do not confuse with the normal TA indicators, here we are talking about the various type of Bars related to VSA analysis)
Some members felt that the thread looked too elementary in a Advanced Strategy section. Maybe it is true. I wanted the thread in this way since it should be easily understandable even for the newbee. Also, even more experienced people are not reluctant to look at the market in this way. The indicator trader would definitely find a Bar by Bar analysis a hard pill to swallow.
A note of caution, before we proceed into the real VSA study. Please note that it will be difficult to build a mechanical trading system from VSA though not impossible. However knowledge of VSA will greatly help one to understand the market better and will be a great support tool complimenting their trading systems. Also VSA on its own provides some excellent entry and early exit points resulting is good profitable trades
Finally…. we will step in the actual VSA. VSA measures the weakness and strength of individual bars. In addition it looks at the background strength/Weakness. So we have to always look out for Weakness in a uptrend and for strength in a down Trend.
Each bar could be characterized to indicate Strength or Weakness based on the Spread and volume.
We will start with looking out for weakness. First we will look into one of the most easily identifiable and strong indication of weakness which is commonly called the UPTHRUST Bar. And what a day to talk about Upthrust… The charts are full of them today…Even the nifty is showing a Upthrust…of course not a one of the ideal one. But distinct weakness shown on the nifty.
What is an UPTHRUST BAR ?
An Upthrust Bar is a wide range bar, with a high volume and closing down. It indicates that the prices were marked up during the day (for simplicity we use day, it is equally applicable on all time frames), the Trading activity was High as indicated by the High volume and the prices dropped to near the low (or to the low) towards the closing hours.
Looking the SM perspective what happened was that the SM marked up the prices in early trading hours indicating strong bullishness. Enticed by this bullish move the weak money also rushed to acquire the stock. Shorts if any would also have rushed for cover. Meanwhile the SM is quietly distributing their holding to the weak money. In the later part of the day the SM drastically marks the price down trapping the weak money holding stocks at much higher prices.
In order to make this ideal, the Upthrust normally appears after a wide range upbar with high volume. This makes it easy for the SM to markup the price and entice the weak money. Most of the time the Upthrust will be moving into new higher territory. The High of this bar will be much higher than the previous high.. High volume should be an important consideration.
What are the Things to Look for in a Uptrust?
1. High Volume and How high?
2. Wide Spread?
3. Close, near or on the Low?
4. What was the previous bar action?
5. Did the bar into new territory?
6. Is the stock in an up trend?
...........................................What are the Things to Looks for in a Uptrust?
1. High Volume and How high?
2. Wide Spread?
3. Close, near or on the Low?
4. What was the previous bar action?
5. Did the bar into new territory?
6. Is the stock in an up trend?
The Answers for the above would decide how potent the Upthrust is.
High volume Upthrust are a sure indication of weakness, higher the Volume the stronger the indication. It may be even wise to get out of the stock if the Upthrust has ultra high volume.
Wider the spread more potent the Upthrust
Lower the closer the stronger the indication of weakness. Ideally it should close should be the Low. If the close is towards the middle it would mean than the SM was not successful in marking the price down. There was too much demand.
An ideal Upthrust will move into new territory. The High will be very much higher than the high of the previous bar. This means the SM was really successful in marking the price up and many traders get trapped into bad positions in the end of the day.
Upthrusts are effective when the trend has been in force for some time. Sometime you would find weak up thrusts in early trends.
Many times you will Upthrusts with low volume. I call them Pseudo Upthrusts. These are not effective as the Upthrust. But are still signs of weakness..
............this view r from Kartik...............
There is no secret to what I do. I rely on price structure and visualization to narrow my stocks down. If in a sector I see bunch of stocks with a positive structure, I place them on my large LCD screen and view them from a distance of atleast 10 feet. The one which looks the best is the one I select to trade.
Look at Hindalco, Tata Steel, Sail, Sterlite etc. All have descent short term price structure. But when I saw Hindalco from a distance, I just knew that was the stock to bet on. Similarly, probably all auto stocks have good price structure, but the best one's from a 10 feet distance are Bajaj Auto and Tata Motors.
About 10-12 days back, when I had written to avoid Banks, I did the same. I am not completely bearish on banks. It is just that now I see gains coming from other sectors. Even if you look at Sugar stocks, the best price structure and visualization is in Renuka sugars. Hence, I am vested in the same.
One more important factor in determining where to invest is the awareness of market fundamentals and sector valuations. If you see, the simple reason why banks did not appeal much to me were because the valuations (short term) were simply exorbitant. It had to correct and I am glad it is correcting. Eventually when banks are ready for upmove again, they will contribute immensely to the broader market. I have positions now in commodity related sectors as I feel that markets will largely rally due to this sector doing well.
In conclusion, if I have to sum it up, I combine Price structure and Visualization with Fundamentals and Economic analysis to determine what will probably happen next. Once the initial view is structured, positions are taken. In this thread I can teach price structure but I cannot teach how to build Economic insight. This is something which will come naturally after observing markets and understanding structure of our economy.
Hope you understand that there is no holy grail.
