VOLUME SPREAD ANALYSIS
Friends
For me TA is a passion. I have been experimenting a lot on various aspects of TA. It has been a good learning experience. Sharing my experiments was a bigger learning experience. Truly, unlike sharing money sharing knowledge only leads to further expansion of knowledge.
A few months ago I came across a thread on “Volume spread Analysis” in the Traders laboratory forum. Tough I did not understand much the seeds of interest were sown. Thus began a new chapter in my TA journey.
I had posted some charts based on my work on this. A few had shown interest on this especially our esteemed Asish. So we will begin a discussion on the “Volume Spread Analysis”. I request other knowledgeable members to add their bit to this discussion so that we have fruitful learning experience.
Calling VSA as advanced strategy may be controversial. But the concept is rather new and is gaining wide popularity. Hence we will consider it as advanced strategy.
Regards
karthik
Note: As we know this will be a restricted thread. Those who cannot post their doubts can still posts queries in my other threads and genuine queries would be answered there. Good post even will be copied on the main thread. Now that the awareness on the reputation points has grown, we hope more members will be able to post in this thread.
Some background notes……..
Once the seed of interest were sown hours were spent searching the net and watching clips on Youtube. The journey was full of obstacles. There was hardly any clear cut information available. Most were sales talks with sketchy information. Then hours were spent studying the charts and formulating rules. The rules were coded to check the validity of these rules. Some Traderji friend stepped in and there were some real time checks for these rules. Thus we came up with our own interpretation of the “Volume spread analysis”.
Please do not start comparing my description with the ones that may be available from the net. I have used some basic stuff from Tom Williams’s book and have built on it. Here we are not trying to clone the Trader Guider system.
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
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 Price and volume 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.
Now it is time to move on ….
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.
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
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
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…..
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
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 accumulation 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
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
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 arkdown 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
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
distribution. (If you are wondering what is selling climax.. don’t worry.. we will take it up in detail later.)
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 ve