Decoding Volume: Support/Resistance/Supply and Demand

tech/a · 17 June 2010

There is a lot of confusion with regard to reading volume.
I'll attempt to make it as clear as crystal for those struggling.
To do so we will have to construct the very essence chart reading and indeed technical analysis---Regardless of the form of analysis---all will be come clear.

All trading is governed by Support and Resistance.
If we trade trends we expect and look for price to break resistance.
If we buy pull backs we expect support to hold so we can jump on a trend.
We sell when we believe resustance will hold and price will not rise further.
If we trade short we look for support to be broken and we look to buy back when we believe support will return.

So whether it be Bollingers,Elliott,RSI Stochastic,trendlines or Volume its support and resistance we seek.

So to Reading volume

Reading volume is all about SUPPLY.
(1) Supply either dries up OR
(2) Supply is overcome by demand.

The big problem for everyone is identifying volume as (1) OR (2)

There are a few ways of doing this.
You can read volume like T/H.
You can look at lower timeframes Daily to 30 min for example.

But for those who cant or dont have access to either of these the answer is simple.

You CANT tell if volume is Drying up or being absorbed until further Bars show you the answer.

Remember price CANNOT MOVE UP unless supply has been exhausted--EITHER from being withdrawn OR over powered by buying

Lets take a look at a classic example

Here we can follow each bar and actually see volume dry up.
Clearly it is absorbed and sellers leave the market---at this level.(Where the volume is)

So now lets see what happens further along in the chart (Its HGO if you hadnt noticed.)

Is that clearer now??

Whiskers · 17 June 2010

Re: Decoding Volume---Support/Resistance/Supply and Demand

That's a good explination, tech/a... but... "You can read volume like T/H.
You can look at lower timeframes Daily to 30 min for example."... you mean there are traders who work with only one time frame?

Maybe that's why I get so tired.

I use multiple time frames at the same time most of the time. It takes a lot of effort to get focused and comprehend what's happening.

tech/a · 17 June 2010

Now lets have a look at what Buying over powering supply looks like and some charateristics going forward.

you mean there are traders who work with only one time frame?

Yes of course.
I trade in one timeframe myself.
I look for hints at times in others though.
Certainly dont trade a daily trade using a 3 min chart though!

$20shoes · 17 June 2010

That's great Tech. I've tried to pull a TH style analysis on BLY (thanks for HGO, TH) which we had discussed over on the other thread. It's a very interesting stock for educational purposes because there's a lot going on with volume.

One thing which you have down pat, and which newbies may struggle with is how volume zones set up points of support or resistance. You can see on BLY that points 5,6 and 9 set up a longer term supply zone that obviously speaks to distribution.

That is, extreme volume often marks a point where a stock is now looked upon differently. Tests of this volume zone can often give us indications of how the market now values this stock.

As you have shown, low volume can speak volumes ( bad pun).

sagitar · 17 June 2010

Hi Tech/A,
A good post! I wanted to add my 2c worth - I think it's important to note that volume itself can also advertise deceptive messages about the trading pattern, particularly if there's a substantial change in price over a relatively short period of time. This is often prevalent or more noticeable in penny stocks where the volume during this phase of price change starts to decline substantially, thus leading some to wrongly conclude that interest in the stock is waning. BUT, in reality, what may be potentially occurring is that more money is actually entering the stock despite the lower volume simply because people have to dish out more cash to pay for the rising cost or price of the stock.

For example, if stock XYZ traded today at around 1.5c with a vol of 10M (equating to a value of $150K worth traded) and then over a short period of time the price reaches 2.8c but with an average volume now down to 8M, a quick calculation of the current traded value would equate to $224K. So in reality the price is rising (construed as bullish), volume is dropping (construed as bearish) BUT people are willing to put more money into the pot, thus confirming a bullish sentiment is still at play.

So, sometimes bearing in mind the value traded per day can be a bit more informative than simply using volume alone.

That's my 2c worth....
cheers

tech/a · 17 June 2010

sagitar said:
Hi Tech/A,
A good post! I wanted to add my 2c worth - I think it's important to note that volume itself can also advertise deceptive messages about the trading pattern, particularly if there's a substantial change in price over a relatively short period of time. This is often prevalent or more noticeable in penny stocks where the volume during this phase of price change starts to decline substantially, thus leading some to wrongly conclude that interest in the stock is waning. BUT, in reality, what may be potentially occurring is that more money is actually entering the stock despite the lower volume simply because people have to dish out more cash to pay for the rising cost or price of the stock.

For example, if stock XYZ traded today at around 1.5c with a vol of 10M (equating to a value of $150K worth traded) and then over a short period of time the price reaches 2.8c but with an average volume now down to 8M, a quick calculation of the current traded value would equate to $224K. So in reality the price is rising (construed as bullish), volume is dropping (construed as bearish) BUT people are willing to put more money into the pot, thus confirming a bullish sentiment is still at play.

So, sometimes bearing in mind the value traded per day can be a bit more informative than simply using volume alone.

That's my 2c worth....
cheers

Certainly interesting have you done any testing on the idea?
Any reliability to the theory?
Perhaps an indicator.
Im sure it could be coded up easily enough.

Good stuff shoes.
Will move into some more interesting ideas as time goes by.

satanoperca · 18 June 2010

Thanks Tech/A for the write.

It certaintly has become clearer.

You need to be able to see the story of volume and price playing out over a timeframe between the buyers and the sellers with each time unit being a chapter in the book.

This is fascinating stuff.

Cheers

Frank D · 18 June 2010

tech/a said:
All trading is governed by Support and Resistance.

Finally after all these years you are beginning to make some sense.

Trembling Hand · 18 June 2010

satanoperca said:
You need to be able to see the story of volume and price playing out over a timeframe between the buyers and the sellers with each time unit being a chapter in the book.

Most of its pretty simple stuff when you look at the basics.

Starting with high volume. The ONLY way you can have high volume is if insiders/existing holders sell - for what ever reason. Thats it (ignoring shorts because if you follow the short sells list you will see they are minuscule).

Look at where the high volume price is in relation to where its came tells you everything about those sellers. If volume comes from insiders the reaction after the volume has passed tells you the thinking of those who hold the cash.

<EDIT> Chart is daily BRM

tech/a · 19 June 2010

Using BRM

I would like to introduce the concept of EXTREME volume support and resistance.

While not all of the zones marked are EXTREME (Or all possible zones) I have marked up the chart to show the concept.The more extreme the volume to more support and resistance are respected.(I have found).
If you look back over the last 400 bars there are probably 3 EXTREME zones.

Garpal Gumnut · 19 June 2010

Pure gold, tech/a.
Keep up the quality of these posts.
support /resistance, vol, bar size, close, strong , weak, buyers , sellers, and that point you made of the difficulty of working out, who is who , until the next bar.
Its easy to forget this basic stuff in the heat of a trade, and its valid over all time frames imo.

gg

$20shoes · 19 June 2010

Thanks Tech.
I've kept some further examples simple, to illustrate the validity of extreme volume zones casting their shadow. These can make for interesting intersects and pivot points in the market. It's not a golden rule, but what should be obvious to traders is the market's perception of a stock on the left side of a extreme volume bar can be fundamentally different to the right side of the extreme volume bar. How that volume is handled ( is it absorbed by demand etc) can set up the direction for new runs and even longer term trends.

I haven't drawn it in to AJL, but as an example the first extreme volume bar on 18th Dec took the wind out of it and became the onset for 6 months of price decline.

tech/a · 19 June 2010

It seems a few here like myself prefer to use support and resistance zones.
These zones work well with consolidation---with or without volume

VOLUME alone in its extreme however tends to create its own zone of support or resistance with or without consolidation (Although it is common to see consolidation after an extreme bar.)

In particular long term past zones can become excellent areas for low risk opportunity.
Using AJL as an example.
I place these zones on my charts during searches for extreme volume.
I also find WEEKLY charts are excellent sources for early LONGTERM signals with volume support/resistance.

ceasar73 · 6 July 2010

nice post t/a.
Do you think darvas box and livermore pivot points where simply levels of support/resistance?

cheers.

ceasar73

tech/a · 7 July 2010

Yes.
Darvas boxes are simply areas of agreemant with current price levels.
Once there is disagreement then price moves again.
Not familiar with Livermore pivots.

white_crane · 12 September 2010

Another excellent thread. Thanks tech/a (and the other contributors too)

tech/a · 12 September 2010

Should add to this thread as there is quite a bit more.
When I have time.
Unless others beat me to it.
One really interesting aspect is what happens when volume dries up.
What does it mean in the context of a chart.

I look for sizable volume and then want to see what LACK as in very very low volume (1 bar in my timeframe) going forward is telling me.

Lack of volume generally indicates a lack of demand or supply.
The range and position of the bars close relative to the bar before it will tell the story.

Example

Apollo_kk · 21 September 2010

Tech/a

Nice stuff. Just one question are the concepts of support and resistance related to accumulation and distribution or are they unrelated? I guess that when you are talking about supply and demand you are talking about distribution and accumulation is that right and not support and resistance. Is there an indicator that measures supply and demand?

Thank you in advance
A

tech/a · 21 September 2010

Apollo_kk said:
Tech/a

Nice stuff. Just one question are the concepts of support and resistance related to accumulation and distribution or are they unrelated? I guess that when you are talking about supply and demand you are talking about distribution and accumulation is that right and not support and resistance. Is there an indicator that measures supply and demand?

Thank you in advance
A

In situations above its more a dump or exhaustion of buyers or sellers which is indicated.
Accumulation and distribution will be seen at resistance or support areas over repeated attempts to break through rather than an isolated case.

There is quite a discussion on this---unfortunately off for a couple of weeks so will return to this thread when Im back---or if I can get it on my I phone i may check in while away---if I have time.

Apollo_kk · 21 September 2010

Thanks Tech

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