Candles and VSA

[TinGull]

On the VSA thread, brownsfan019 had asked me to start up a discussion on volume spread analysis and candle formations. PivotProfiler does a great job talking about VSA and hopefully we can gear this discussion to be a little more based on how candles and VSA can be integrated together into a nice way to trade profitably.

I'll throw up the first chart from yesterday on the ES.



1) we have a 2 bar reversal here. Note how there was strong volume on the opening bar. 56k contracts in 5min. ES usually averages what...25k in 5min (sans the volatility we'd been seeing). This is a big volume up bar, but not too huge a spread. Then, you get a lower volume down bar that closes off it's lows. This is a test of sorts, to me, to see if price wants to fill the gap at the open. Obviously, with lower volume, it can't because it needs participation to do that. The next bar engulfs the low volume down bar with higher volume. Price attracts volume, volume does NOT attract price. Path of least resistance is now UP.

2) We see even MORE volume than the strong opening bar with a close about midway down. This is also seen as somewhat of an inverted hammer/topping tail. Seeing that excess in the form of a wick on the candle shows a little weakness. This coupled with the strong ass volume...shows you some supply could be creeping in. With that much volume, you expect to see follow through. The next bar after is still seeing some excess supply, but not as much. It did break the high of the bar prior...closed higher...so far so good. We still much remember that we're in a phase 2 uptrend on the 5/15min charts.

3) The spreads started to get a little smaller up here and volume has started to decrease until this bar. The spread is still smaller compared to everything else this day so far but we get a nice jump in volume with a bottoming tail associated with the candle. High volume on a narrow-ish spread is showing accumulation. "Big money" -if you will- is trying to keep the price down so they can keep buying at what they feel is a good price. The next bar tries to go lower but was quickly bought up. Now we've got an UP bar closing in the upper 2/3 of the range...but on lower volume....what do we do? If we're long, we can stay long with some confidence. If we're not long yet, I wouldn't put on a full position, but I think a marker lot would be warranted.

4) Getting higher volume up bars with a close on this bar in the lower portion of the range. This also was a probe outside of the 30min opening range. When price gets pushed outside but comes back in on nice volume...that usually signals a breakout is imminent. Its just a matter of when. Now, to some, this topping tail after a spinning top is showing some real indecision. That is very true. Remember, though, where the big volume came in and realize that for price to push down through those levels is going to take a good amount of volume. So far, we don't see that kind of volume. Price gets held in the upper half of the opening range, another sign that higher prices are likely. From a candle perspective, you now start to see signs of demand entering into the market by wicks on the bottom of the candles.

5) BIG range and HUGE volume. VSA tells us that the market doesn't like to see things like this. Price closed just off it's highs, too. This tells me that in order for price to move higher, we MUST see confirmation right off the bat. The next candle is a narrow range lowwww volume candle. Was there demand in that big up bar? A little...did supply overtake the demand? Obviously. When we see the next candle also a DOWN candle, WIDER spread and HIGHER volume....we know that since price attracts volume, we're heading lower.

6) Higher volume re-entry into the range. Now...knowing we're in an uptrend still on the 5/15 and we see a HUGE volume HUGE spread bar that closes right near it's lows, we think...the move should begin up now. What happens next...People who got long thinking theyd jump the gun don't see the follow through. What happens after that? A larger volume down candle who's range engulfs that potential reversal candle. Now the bulls in the crowd get nervous and start to wonder if price is really going to head back up.

7) In this range we see that price gives up a nice little reversal candle at support. Enough people buy it to give price a boost. What happens next is interesting. Note how volume absolutely DRIES up at the top of the opening range. "Price attracts volume" and volume is NOT attracted to these higher prices as it tries multiple times to break that range. So, what is the path of least resistance everyone? DOWN!

8) This area sees volume increasing gradually as price heads towards the lower end of the 30min OR. In Markets In Profile, Dalton talks about seeing volume increase towards the extreme of a range and that signals price could break through it. If price were to bounce from that, we'd want to see volume gradually DECREASING like it did at the top of the range. We have good evidence that price has a HIGH likelihood of breaking down through this range. With price now trading below the 20sma, too...added evidence to the story. Price does start to give us narrower ranges, but as the range narrows we get less and less volume. Obviously there's no accumulation happening during this bottom. By the size of the wicks on the top of the candles, you can see some supply is still in the market. Price still fights to get higher.

Note how we get a big bottoming tail on higher volume. This shows that it *could* be a range breakout failure. Aggressive traders might have gotten long around 1541.75. The next candle tells the tail, though. We do get higher volume, but now a topping tail/inverted hammer. While this is showing indecision, we're starting to get evidence that the downside move isn't really over. A nice spread candle closing just off it's highs on higher volume re-enters the range. YAY for the bulls!! Still couldn't close above the 20sma.... Price then starts to decrease as it comes back to the range bottom, again, good case for the bulls. But notice we're starting to see excess in the price action shown by the wicks on the top of the candles. tsk tsk tsk bulls....get out!

9) After the bulls liquidated in a hurry and we saw an 8 point or so drop the gap is just about filled on the ES and the big money swoops in to save the day. How do we know this? Look at the HUUUUUGE volume on the HUUUUUGE spread AND we get a "Jackhammer" formation (from John Person). The aggressive trader gets long here.

The next little arrow is showing a "test". The bar is on substantially lower volume closing in the lower half of the range. Price is seeking out sellers, essentially "auctioning" itself off saying "Here I am guys!! Wanna sell me? Now's your chance!!" When there are no takers to the downside, where do we go? UP! If you are already long, ADD MORE!!!

10) At this point we've rallied about 10 ES points in an hour. Not a bad days work. Was there ever evidence to get out of the trade completely? Not until this bar. BIG topping tail which also coincided with about a 50% retrace on BIG volume. Bigger than the selling volume earlier in the day at this price area? Nope. So there's not enough volume to push it through to the upside, and we see obvious characteristics of excess shown by the topping tail. With that much volume on an UP bar, we'd want to see follow through. What doesn't happen? Follow through doesn't happen!

11) Big volume on an exit of the 30min OR and then a hammer on lesser volume. We *should* see a bounce since there was no follow through on that big volume, big spread down bar. Obviously some demand had to enter, but how much? Then we get even BIGGER volume on a candle that closed at it's highs, but failed to re-enter the range. When price can't move forward after that, we know we must be headed down. Which leads us into this morning with the markets down pre-market.

So, that's a little story of how I see the markets. Hope that helps.

[brownsfan019]

Good stuff Tin, I will take a look at closer after the close.

Thanks for sharing.

The quality of the posts on the forum here recently have really gone up in my opinion.

[TinGull]

You're quite welcome! And i agree...this forum is awesome.

[Reaver]

I am in the process of studying a different aspect of AMT, but I am looking forward to really being able to dig into VSA and see what I can learn. Thanks for the info.

I agree with brownsfan, there has been a huge increase in the education factor here at TL.

[RAVIN]

Great stuff TG, I used to go on Trade2Win forums, there are some in depth discussions on price/volume as per Wyckoff by Dbphoenix, however it has remained mostly theory culminating in endless ego based arguments with hardly any charts of real trade. Anyway having said that, there is much to learn on the significance of volume and price action.
Notice that you have a market profile logo beneath your name, perhaps you could incorporate that into your discussion, am sure that when price reaches one of the high vol areas via market profile, it will react with volume and that should provide certain signals as and when price say approaches the pivot levels or any of the fib. retracements

[TinGull]

Hi Ravin,

You're certainly correct when you mention that price will react a certain way when it reaches a high volume or low volume node. Typically one would watch for volume to start to decrease as it comes into a HVN. If it starts to "attack" that node, then chances are very high for a break through that area. Same goes for LVN's.

[mcichocki_]

Awesome post Tin, thanks for the insight.

[TinGull]

Some more action from today. As price broke back down into the 30min OR after breaching it we had a nice "no supply" bar, which also formed a doji on significantly lower volume than the previous "re-entry" bar. While the next bar wasn't showing us demand in the form of volume, it did show it to us in the form of a candlestick. This is an old school 3 bar reversal if I'm not mistaken. I think the volume could have been better, and that was the reason I didn't take that trade. I *almost* did, but I like having a bit more evidence for me to get in than what presented itself on this chart.

[strtedat22]

nice analysis tingull

[Reaver]

Looking forward to seeing you utilize this on a swing basis too.