[VSA] Volume Spread Analysis Part II

[Seb Manby]

Hi Dandxg

I`m glad you like my videos. you should rate them for others.

Contact Gavin for Aspen.

Regards Seb

[Ricks Inn]

	Quote:	Seb Manby
	I`m glad you like my videos. you should rate them for others. Regards Seb

Hi, Sebastian - Will video analysis like this be a part of the VSA Club? How's that coming along?

Best,
Rick

[dandxg]

Sebastian, hope the rating went through never did that before. Here is a chart I want to post that hopefully Eiger and yourself could respond to. This is one that really causes me confusion. Now mind you I didn't buy the test on this 3 min because, thanks to you and Eiger I didn't first have a succesful test on a 15 min or higher time frame. I know it's FOMC announcement too.

Anyway at the right edge of the chart as Gavin like to say, it hard, IMO, to tell if this is absorption volume/pushing up through supply or a buying climax which this turn out to be. See how A is a high volume up close greater than the supply line and upthrust to the left? Then right after A we get a test, which fails, and then at the PDH, which is a S/R I use and works often, but no it turns out to be a BC and not absorption volume. Do every one else see the confusion on this or is it just me. No if like me you are contemplating buying a test on close you would have been stopped out very quick. What am I missing? This just seems like a toss up whether it's a BC or absorption volume many times and one doesn't know until minutes later. TIA

[Eiger]

	Quote:	Seb Manby
	Eiger; There is nothing difficult about reading your chart, I have uploaded a video for you to view. I did not look at the date(20th feb), I thought it was from the 24th June. I had an email from Gavin, look forward to meeting you in Aspen best wishes Sebastian

Hi Sebastian,

Great video analysis! You're right, I didn't expect you to do that -- it's better than I expected.

The date was was Feb 20th. I thought it was an interesting chart because of the pre-market news (CPI & Housing Starts) being used to shake out the market and provide professionals with the opportunity to buy off the news for a later mark up. When you watch the response to the early AM news items from a VSA perspective, you can often see what the tone of the market will be for the rest of the day, as in this day.

I thought it was pretty interesting, too, that professionals kept it in a fairly tight range through the morning session, but the bottoms kept rising, and then pushed it up into the noon hour. The later girations around 2:00 were the FOMC meeting minutes being released. I suspect that they used this news and the subsequnt rally to unload what they had accumulated earlier in the day. Bookends of news for accumulation and distribution.

Brilliant analysis, as always. I got a lot out of it

I'll be talking with Gavin next week. We'll see how it goes. It would be great to meet you in the fall.

[Eiger]

	Quote:	dandxg
	Anyway at the right edge of the chart as Gavin like to say, it hard, IMO, to tell if this is absorption volume/pushing up through supply or a buying climax which this turn out to be. See how A is a high volume up close greater than the supply line and upthrust to the left? Then right after A we get a test, which fails, and then at the PDH, which is a S/R I use and works often, but no it turns out to be a BC and not absorption volume. Do every one else see the confusion on this or is it just me. No if like me you are contemplating buying a test on close you would have been stopped out very quick. What am I missing? This just seems like a toss up whether it's a BC or absorption volume many times and one doesn't know until minutes later. TIA

Hi Dan,

I'll give you what I can on this ...

Tom Williams always talks about the importance of background. Things in the market, like in life, do not happen out of context. I made a few posts recently about being aware of support and resistance. This is part of the background, either in terms of horizontal areas of S/R, trend channels, pivots, etc. The eRussell is not a market I trade, but the principles all hold across the markets. Let's first look at the background as it evolved on the 15-minute chart (first chart).

You've heard the adage, 'support becomes resistance.' This chart shows it pretty well. Support along the 719 level that first came into the market on 20 June became resistance on yesterday and again today. You can see that pretty good volume came in just before noon on the 24th and again this morning. Price was rejected at the 719 level both times, showing supply was dominate at that level. Just before the bar you asked about as the FOMC made it's announcement, volume again came in high at the 719 level and once again price was rejected (at 1). On the rally back up, there was No Demand at 2, confirming the supply we saw at 1 and all of the Ss. So, the background was dominated by supply.

I added a couple of old charts where price broke through an old top. In the first one from 3 April, you can see there was supply at D, which extended further to the left (not shown). From F, the market rallied. Notice the character of the rally. There is a stair-stepping, volume tends to expand on the rallies (F-G & H-I) and recedes on the reactions (G-H, I-J). Note that most of the bars on the rallies close above the previous bar's close. We make a new high at I, and the reaction to J holds at prior support (G). The reaction to J sees volume diminish and spreads tend to narrow. Very orderly and quite bullish. Note the push up above the supply areas at D & I. Several wide pread up bars, closing on their highs on good, but not excessive volume (compare to volume at D).

Here's another example from the other day, 19 June. Again a significant supply area (A-J-O-R). When the market reacts to S-T, it holds support. The reaction does not draw out supply (high volume). On the rally up and through the top of the trading range, the bars are orderly, wide spread, closing above one another and volume expands as price rises.

For one additional example, look at the 20 February chart posted earlier (not posted here) that you and Sebastian analyzed. (That was a nice analysis you did on that chart). Look at how support was held on the reactions, the character of te reactions, and the quality of the rally that broke through the resistance in terms of price spread, closes, and volume.

Now the 3-min chart. Right after the FOMC announcement very heavy volume came in over several bars, and price could not get above the 719 level - not a good sign. Instead, both volume and price expanded to the downside, indicating supply was in control. Note that price was unable to hold support that extended back to 9:45 or so. Instead, price pushed well through that support and makes a lower low. There was also a lot of churning with fairly wide price and high volume in the circled area. Comapre this area in terms of volume and spread with the other charts. Volume was still high on the reactions. The high volume area (red arrows around the 713-711 area) was never adequately tested. When price did go up and through resistance, it did so on ultra wide spread and the highest volume on the chart (excessive). It didn't push through resistance on several good demand bars with expanding volume like the other charts. It also didn't get very far above resistance before starting to react, again, compare to the other charts.

Sebastain has noted that when there is an important new announcement, a simple notion to think about is that when the market is taken lower during the day, the odds favor higher prices off the news, and vice versa.

Hope this is helpful.

Eiger

[dandxg]

Thanks much Eiger. I would respond more but my computer is being difficult. Oh the beauty of Microsoft.

[Eiger]

I got a question via PM from another trader who asked about tests in a recent chart. I thought the question was a good one, and a topic in which other traders might also be interested. Thus, I thought it was worth posting. Here is this trader's question:

... I have a question about the 2 N 's [as] tests. I am confused with your second N test. I don't understand how you identify the second N [as a] test and What it is trying to test ...


Here is the response:

... The Ns. Test bars always test supply in the background. In this chart, there is testing of the supply at D and at K. Even though both of those bars (D & K) closed well off their lows, the volume and also the wide spreads (especially on D, but also on K) showed very heavy activity. Much of that activity was supply. There had to be supply to generate that much volume and those wide spreads. Because the bars closed in the middle, we know that there was more buying than selling on those bars. Nevertheless, there was still supply. This is what is being tested by the N bars.

Tests are always down bars (i.e., close below the previous bar's close). Ideal Tests have narrow spreads (compared to recent bars), have volume less than the previous two bars, and close in the middle or the high. In this chart, the ideal Test is seen on bar P. Bar P is a down bar, narrow spread, close above the middle, and volume is less than the previous two bars.

We don't always get the ideal, unfortunately. The first N, for example, is a down bar, volume is less than the previous two bars, but the spread is rather wide. The close is also on the low, but the close is the least important feature of a Test. It is nice when the close occurs in the middle or high, but not an absolute requirement. Many excellent Tests (meeting all the other criteria) close on the low.

Although this first N is definitely a Test and shows supply is drying up, the spread is still rather wide. Spread relates to activity, so there was still a lot of activity on the bar, even though the volume was low, meaning that it is unclear whether or not supply has been fully mopped up. This is why the market was tested again at the second N.

The Second N is more conclusive, even though the volume is not quite less than the previous two bars. It is more conclusive because: 1) there is an uptrend occurring (higher lows, this is very bullish - always pay attention to a Test in an uptrend), 2) spread has narrowed, 3) volume is very low on a down bar into the area of D & K where high volume (supply) had occurred before. Even though this does not absolutely meet the criteria of volume less than the previous two, the bar is showing by its spread and low volume in the area of high volume of D & K while in an uptrend that supply had completely dried up. And, higher prices naturally commence after this bar.

Thanks for your question, ___; its a good one!

Hope this is helpful,

Eiger

P.S. To BlowFish. I am working on the videos

[tawe trader]

	Quote:
	Tests are always down bars (i.e., close below the previous bar's close). Ideal Tests have narrow spreads (compared to recent bars), have volume less than the previous two bars, and close in the middle or the high.

Eiger,

Thanks for another very important and educational post.

Just to clarify things (if not for myself then for other novice VSA'ers), am I correct in assuming that a 'bullish' test is only seen as a positive test (ie signal to go long) AFTER the next bar closes up ?

Regards
Tawe

[jjthetrader]

	Quote:	tawe trader
	Eiger, Thanks for another very important and educational post. Just to clarify things (if not for myself then other novice VSA'ers), am I correct in assuming that a 'bullish' test is only seen as a positive test (ie signal to go long) AFTER the next bar closes up ? Regards Tawe

Yes. There must always be a confirmation for this to be valid. If the next bar were down this would be a failed test.

If you wanted in early you could try and take a limit entry, after the high of that test bar is broken, somewhere within the range of the test bar. But this would not be how Tom teaches it. This would just be one way to trade it. As always, getting in before confirmation is much riskier. Better to wait for a worse price and have more confidence.

[firewalker]

	Quote:	jjthetrader
	Yes. There must always be a confirmation for this to be valid. If the next bar were down this would be a failed test. If you wanted in early you could try and take a limit entry, after the high of that test bar is broken, somewhere within the range of the test bar. But this would not be how Tom teaches it. This would just be one way to trade it. As always, getting in before confirmation is much riskier. Better to wait for a worse price and have more confidence.

I'm not sure it is per definition riskier. It depends on how you define 'risk'. What if the test you observed happened on a 1 hour bar. Are you going to wait for the next bar to close? If so, you might enter when price has already made it's turn and presuming you want to put your stop below the low of the test, that might been a hell of a lot more risk as opposed to entering on the test itself and having a very tight stop.

I'm not criticizing your or someone else's approach. I'm just saying the 'risk' is determined not only by the probability of your trade, but also by the stop size and the position size you are trading. Each trader must find out what style suits him best, and whether he likes to wait for more confirmation (hence sacrificing the best entry) or enter aggressively with a tight stop, but -perhaps- a higher chance of getting stopped out.