[VSA] Volume Spread Analsysis Part III

[shreem]

Hello VolumeJedi.

Thanks so much for your great contribution on these VSA threads. It is muhc appreciated. I really enjoy very much your analysis and the way you see VSA in action in a chart.

Your way of looking at the market is really enlightening and help me so much how to read VSA setups correctly.

Also, i do agree, that signal and clue from a previous high volume WRB is one of the best setup one can look for as the high volume WRB do represent big activity of the BB and a retest of that previous zone, will show the prints of the BB and how much are they interested at those same price, either up or down.

Again, thanks so much for your effort and it is appreciated by a lot of people

Sincerely

Shreem

[VolumeJedi]

Beautiful.

Hope you like this chart and can learn something. Please tell me what you think is important that I may have missed. As the thread is not very active currently, the view you are getting is a bit one-sided, I hope that's not a problem. Let's take a look at the chart below:

A: This is a "transfer of ownership" type of bar. We have a narrow range down bar with ultra high volume closing in the middle of the range. This bar is very bullish. We wouldn't go long just off this type of bar anyways, but we have to be especially careful here as it is just after the "open".

B: For the Market Profilers, this bar sets our initial balance, or opening range, low. What the VSAers care about is that this is a wide spread down bar closing off its lows on ultra high volume with the next bar up. All that volume can not be selling. Otherwise, the next bar would not be up. There is a desire to take the market lower on this bar, hence it is also an Effort to Fall. This will become a key thing to keep in mind. Some BBs are entering on the sell side in this price area. Remember, VSA states that not only are the BBs at war with the herd, they are at war with themselves. No smoke-filled rooms with all the BBs making decision together here.

THE ENTRY SIGNAL ZONE

The numbers on the volume correspond to the bars in the shaded area. 1 is the first bar reading from the left and so on.

1: This is a narrow (NR7) rage bar closing down on volume less than the previous two bars. This is no supply. The BBs on the "right" side of the market, are checking to see if there is more supply in this area. If there is an abundance of sellers in this area that means there is too much supply in the market. Why here? Because this was the area that brought sellers into the market once.

2: Increasing range bar that closes near its low on volume less than the previous two bars. This is no selling pressure. The increased range and close near the low belie the fact that there is little professional activity on this bar. Argo the professionals are not interested in lower prices. Yet another example of a low volume bar within the range of a high volume bar.

4: This bar makes a lower low then trades up and closes near its high and higher than the previous bar. Taken with the previous bar it is a not so good example of a two bar reversal. Some might think it one though. Regardless, it is a bullish bar. It is an up bar closing near its high on increasing volume. Yet the volume is not too high. We also note that this up bar has volume greater than the two previous bars where volume was decreasing on each bar.

7: This bar looks a lot like 4. This bar is marked down lower than the previous bar like 4, but this one goes even further to the down side versus the previous bar. We see rejection as price is marked back up only to close on its high. Again volume is increasing on this up close. If you look at this bar you see that it is a "selling bar". This is where the second level thinking of the BBs enters. The herd think this is a weak bar because it makes a lower low and not a higher high-the definition of a selling Dunnigan bar. But the up close on the high after the strength in the background tells the VSAer that this is a weak bar. The lower low shows professional support entering to Prop price back up.

Whilst Tom argues for only entering long on down bars (1&2), any of these bars are good places to get long. Of particular note is the fact that we never got a test. We got other evidence that the BBs were not interested in lower prices, but we did not get a test bar. If either of bars 4&7 had closed lower, then that would be a failed test show some residual weakness(supply) still in the market.

C: Markets do not like up bars on high volume, because there could be hidden selling into the up bar. However, not every up bar is weak. This bar closes on its high with the next bar up and has decreasing, although somewhat high, volume. This is a strong bar. Note that the mid point of this bar is higher than the high of the previous bar. This bar takes us thru the opening range high.

D: This is an Effort to Rise. Here we do have increasing volume on an up bar that closes off its high with the next bar down. Normally a sign of weakness. This bar, however, is strong. The high volume is absorption volume. This bar is pushing thru an old top to the left (see previous chart about the short) and yesterday's high (not shown).

E: I just put this bar in to show an up bar on ultra high volume closing in the lower portion of its range with the next bar down. This is a weak bar. However we now have acceptance above the balance area and the market finds support around the high of the balance area. Also look at the bar prior to E. It is a strong bar. Note how the first test after E is within its range.....

[Tasuki]

VJ, thanks for the very informative posts. I've always been confused about one aspect of test bars. Maybe you'd be kind enough to straighten me out.

I was always taught that test bars were bars whose lows dipped down into supply but closed strong. They were successful test bars if the volume was low, meaning that there was no supply left down below, and they were unsuccessful test bars if the volume was high (like it was in your chart for bars 4 and 7), meaning that there was indeed supply down below, and those lows would probably be tested again before any meaningful advance could begin.

My description of a test bar leaves out one crucial element, and that is whether the bar in question makes a high that is higher than the bar before it. In your chart, neither bar 4 nor 7 did so. Does this mean that they're not real test bars?

Question: to be a proper test bar, does the high of the bar have to exceed the bar before it?

[VolumeJedi]

Originally Posted by Tasuki VJ, thanks for the very informative posts. I've always been confused about one aspect of test bars. Maybe you'd be kind enough to straighten me out. I was always taught that test bars were bars whose lows dipped down into supply but closed strong. They were successful test bars if the volume was low, meaning that there was no supply left down below, and they were unsuccessful test bars if the volume was high (like it was in your chart for bars 4 and 7), meaning that there was indeed supply down below, and those lows would probably be tested again before any meaningful advance could begin. My description of a test bar leaves out one crucial element, and that is whether the bar in question makes a high that is higher than the bar before it. In your chart, neither bar 4 nor 7 did so. Does this mean that they're not real test bars? Question: to be a proper test bar, does the high of the bar have to exceed the bar before it?

Hello. Thanks for the questions. Hope I can help. Like yourself, I am a student of VSA so I may be wrong here. But if we put our heads together, we should get to the answer. LOL.

As I understand it an ideal test bar will make a LOWER low and not a higher high. It will close down and have volume less than the previous two bars. The close will be either in the middle of the narrow range or at the high and DOWN from the previous high. It is confirmed when price closes higher than the close of the test bar. And this should happen within the next 1 or 2 bars. Again, I have mentioned the idea of "Selling bars" before. A "selling" bar makes a lower low and not a higher high. The herd calls them "selling" bars because they make lower lows and they see this as a sign of weakness. One definition of a downtrend would be successive price bars making lower lows.

What the herd does not see is the lack of volume on the bar. We know that the reason for the dip to lower lows is see, or test, for supply. If there are sellers in this area volume should increase. Also take note that an ideal test will close lower. Yet another sign of weakness to the uninformed.

Of course there are test that are not ideal. Tom talks about some futures markets that usually have high volume tests rather than low volume ones. Normally, as you correctly pointed out, high volume means a test has failed. The BBs marked prices down to search for supply and found some. Hence the high volume.

In the case of 4&7 we get higher closes on or near the top of the range. In these cases the high volume signals that there was support (buying/demand) as price was marked down. Had these bars closed lower than their respective previous bar, they would have been failed tests.

Now as I said in the next post, some test do in fact close up. The bar I described as a test that closed up was immediately followed by a surge in price. That helped me see the bar as a test. Generally, there should be immediate reaction to a test. That is why another way to see a failed test is to not see a higher close within the next 1 or 2 bars.

Things do get even trickier as it is possible for a test to be an inside bar (not make a lower low nor higher high). But let's leave these for later.

[4rings2snails]

VJ, just want to say thank you for the last three charts as they really helped clarify and confirm a few things for me. And nice short FX call on that chart. Worked out exactly how you thought it would, again, good stuff.

[4rings2snails]

Hey VJ,

Can you have a look at this chart on LVS and tell me your thoughts on what the two excessive volume, up an down (side by side) bars are trying to tell us? FYI, the 1 week backround is trending up strong after hitting resistance 2-3 trading days ago.

FWIW I'm currently Long at 11.19.

Any insight would be appreciated.

[VolumeJedi]

Originally Posted by 4rings2snails Hey VJ, Can you have a look at this chart on LVS and tell me your thoughts on what the two excessive volume, up an down (side by side) bars are trying to tell us? FYI, the 1 week backround is trending up strong after hitting resistance 2-3 trading days ago. FWIW I'm currently Long at 11.19. Any insight would be appreciated.

Hi 4rings. Glad to have you aboard. We need more posts like yours so we can all learn from one another. I think its very helpful to see different opinions of the same chart. Anyway, this is a hard one for me. Not sure what LVS is, not that it matters. But please post a chart to so I can see what DID happen. Thanks.

Again this is a tuff one here. I hope what I say helps and if I am wrong , hopefully somebody will chime in and put me on the correct path. That's all I can hope for.


A: This is a narrow range up bar on ultra high volume. A squat. Supply is swamping demand on this bar. The high volume and narrow range tell us that the "market makers", the ones who can see both sides, are bearish. There is a lot of supply being dump into the market to the herd. They think they are getting a good price here, but don't understand the reason behind it. As we see on the next bar B, price falls confirming the supply on the previous (A) bar.

Now it gets muddied.

B:

Scenario 1: Increased volume on a down bar closing in the middle of its range or slightly above it. The close is down and the bar makes a lower low. This bar could be a failed test as the volume is too high for a successful test. If this is the case, there is supply in the market and price is likely to fall. Note that the next bar (C) is an up bar on volume less than the previous two bars closing near its high. It is no demand. This is consistent with bar B being a failed test. There would be little smart money participation to the upside with all that supply lingering in the market. The next bar narrows further and the volume continues to dry up. More signs that bar B was a failed test.

Scenario 2: Increased volume on a down bar that makes a lower low and closes in the middle to upper portion of its range. The long tail of this bar could be showing professional support thus making this a bullish bar. We know when strength appears, it appears on down bars. If this is bullish, we would expect prices to rise slightly, but come back down and TEST around this area. The low of this bar should act as resistance.

Basically I am neutral here. If it is 1 (weakness) I would look for an up bar or a slight pull back finding resistance at the low of B to go short. Of course that up bar should be on low volume.

If it is 2 (strength) I would wait for a pull back and a test in the area of B. This time the down bar should be narrow and on volume less than the previous two bars.

The one thing that I do know is that neither bar is a signal to jump into the market at this moment for me. Hopefully others can enlighten us on the situation.

Edit: added chart

[4rings2snails]

Hi VJ,
Yeah, this stock really confused me yesterday. I got out with a marginal gain right before it almost touch my stop. So I got pretty lucky. Funny thing is, is that this damn thing is trading at 11.39 this morning in pre-market action on decent volume. I hate holding positions overnight, but had I done that I'd be up a few thousand today. Hindsight = 20/20

Well, here's the remainder of yesterday's action so you can see what it finished up doing for the day.

Thanks for trying to figure this one out. I'll chime in later about what it does today with regard to that last heavy down-bar from yesterday. Meaning that possibly scenerio 2 is bullish.

Thanks again for your insight VJ.
Cheers.

[habi]

Originally Posted by VolumeJedi The one thing that I do know is that neither bar is a signal to jump into the market at this moment for me. Hopefully others can enlighten us on the situation. Edit: added chart

Yes, I agree. Such high volume bars within a range are very hard to interpret and I can't find some more information in a 1 minute chart. The reversal with bar 2 and the following formed at least a support area, but the difference in volume for those two bars are extremy high and not much helpful.
A possible entry could be at aroung 10:20 (your time) against the high volume reversal after 10.

It would be interesting, why and when you entered at 11.19

If you look on a daly chart, then you are in the area of a high volume reversal from May 5,6, which closed the gap from last November. It's not surprising, that we have some problems to go up further here.

[BlowFish]

My hunch is the high volume was block trades www.nyse.com/pdfs/5672_Block_Trading.pdf look about half way down to see some of the mechanisms to match large buyers and sellers outside the auction. Once the deal is done bam a print for 250,000 (or whatever) crosses the tape.

Block trades are something that anyone who uses volume as part of there analysis should consider.