Pure VSA

Eiger · #1 02-02-2009, 03:48 PM

This is a thread just for pure VSA.

To start:

Today's 3-minute ES:

Background - Price rallied after the open, then spent an hour reacting in a slow drift down. Volume was less on the reaction than the volume on the rally off the AM lows. Spreads were also generally narrower on the reaction, and as the reaction progressed, volume receded. A Higher Low (HL) was put in.

After an earlier, failed attempt to break above resistance at 1, price held its gains at 2 on light volume (no supply) and also held the Demand Line YY of an uptrend channel. All of this is bullish.

Note the emphasis placed on the background. We always start with the background.

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A - Price pushes through the resistance area (red line) on high volume.

B - Next bar has sustained volume, but the spread is narrowed and the close is in the middle.

C - This bar is up, but the volume has dropped off precipitiously. This tells us in advance that the Supply Line, ZZ, is unlikely to be broken.

D - Supply enters where expected. D is a down bar, closing on its lows on heavy volume.

E - An up bar, closing on its highs after dipping below D indicates another rally will be attempted. However, the narrow spread and low volume indicate that professional money has withdrawn, so the rally is unlikely to go very far.

F - Volume increases and the spread widens a bit (increased activity), but the result is a close on the lows. This Hidden UpThrust indicates supply.

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More Background - Support and resistance are important to VSA. Look at the current chart in relation to the 15-minute chart (attached). We are currently just above yesterday's close and, more importantly, in the 825 area which offered support yesterday moring and early afternoon, but which is now likely to offer resistance. Thus, the background conditions from yesterday are joining with the immediate supply conditions seen on the 3-minute chart for a nice short set-up.

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G - the market reacts to the previous low at E and rallies, but does so on a narrow spread and low volume - No Demand.

H - A Hidden UpThrust that closes below the close of G on an increase in volume. The market now starts to fall.

Good locations to initate shorts were at F, G & H

I - As the market falls, volume increases. This bar was a down bar on average spread closing on the lows. The increas in volume and poor close tells in advance that the support levels from the trend line at YY and the horizontal support line (red line) are unlikely to hold.

J - Tells basically the same story - supply is in control (down bar, increased volume, above average spread, and close on lows).

K - The bar after J is narrow spread, close in the middle and high volume. Next bar is up. Some buying came in here, but K swamped whatever buying existed with a widerer spread down bar, close below the previous two lows on an increase in volume.

L - The swelling volume that came in between J and K knocked the market sideways. Note the spreads and the volume. Spreads are narrow, volume is low and receding as the market attempts to rally. The two bars immediately before L are No Demand. L is a Hidden UpThrust on an increase in volume which caught stops and then closed on its lows. Another good location to initiate a short. The last bar on the chart is wide spread down bar with an increase in volume, closing on its lows. Supply is in full control.

This is just pure VSA. Not too shabby is it?

Always look first to the background, then follow the bars as they tell the story of the unfolding market. Trying to read the market by looking at a bar or two won't work. It will only hurt you. As you can see, adding other things extraneous to VSA is unnecessary and likely to be confusing.

Hope this is helpful,

Eiger

Eiger · #2 02-03-2009, 09:06 AM

Now to the upside -- same day ...

A - Very heavy volume comes in on a down bar. Note what happens on this volume. The spread narrows and the close is off the lows. Buying came in.

B - The market tried to rally, but the rally is lackluster.

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Background Check

Note that this market is coming back down to the 814 AM support area. We would expect the market to at least pause here, and possibly turn and rally.

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C - A break below the low of the high volume bar at A and well into the 814 support area, only to close back above A's low. Volume is still high, but not nearly as high as as the volume seen on A.

D - A No Demand bar indicating supply may be drying up. We can tentitively say that buying is overcoming supply.

E - This bar dips below C but closes in the middle of the spread - buying. Note that the volume is slightly less than at C. Next bar is up -- all bullish behavior.

F - This is an interesting and telling bar. It drives down and is wider spread, but is unable to sustain a low close and more importantly, it is unable to draw out supply. Next bar dips lowrer (to the low of E) and closes on its highs - bullish.

G - No Demand again. Volume has dried up to the downside. This bar closes in the same area as C & E. Compare the volume between G and C & E. This is why we can say volume to the downside has dried up.

H - After dipping back to the lows of E & F, H takes off and pushes up through the congestion on a healthy increase in volume.

Enough cause had been built from A through H to rally back to the noon-hour high.

Please note the process: Background is always looked at first. Volume plays the key role in identifying weakness or strength and in analyzing the buying and selling as the market unfolds. Price bars tell us what happened on the volume. This is the method of VSA.

Hope this is helpful

Eiger

Shamal · #3 02-03-2009, 09:37 AM

Eiger,
presume you meant "No Supply" on D & G bar rather than "No Demand"

Eiger · #4 02-03-2009, 09:40 AM

Originally Posted by Shamal

Eiger,
presume you meant "No Supply" on D & G bar rather than "No Demand"

You are right - those should both be No Supply bars. D is also a Test.

Thanks for catching that

Eiger

Eiger · #5 02-03-2009, 03:14 PM

Question from Sanook that is best answered on this thread. Here is the questions:

On your first 3-minute ES chart from the recent Pure VSA thread, you say, 'Good locations to initiate shorts were at F, G & H.

Could you explain why C, the no demand bar, is also not a good location to short. If I could finally get my head around this problem of seeing no demand bars and instantly thinking short, I'll be making progress.

With regards to F, would I be correct in thinking that you'd enter a tick below and place the stop a tick above.

With regards to G and H, I'll assume again entry is a tick below, but is the stop placed above G and H, or is it left above F. I personally would leave it above F, but if that is seen as being unnecessary then I'll reconsider.

Why is C not a good location to short ... there are several reasons:

First, the background. The Supply Line, ZZ has not been touched yet by C. The Supply Line also represents the area that is Oversold. Taking a trade that is near, but not quite at O/S levels will likely get you stopped out as the market continues to move up into O/S territory, as it did here.

Second, although C is indicating a withdrawal of demand by professional traders, it is still making a higher high and closing with a higher close. The market is still in an uptrend. It hasn't shown definate signs of weakness or distribution at this point (that does not come until F). An uptrend is higher lows, higher highs, and higher closes. We don't like to take shorts in an uptrend because of the high risk.

Third, the spread is still average. We want to see a narrowing of spread. The narrow spread indicates a lack of activity. Activity on this bar was no different than the previous two bars, even though the volume was less. When activity remains high, the odds for continuation of the present move remain high, as was the case here.

Compare G and the two bars preceeding L with C. The best No Demands on this chart were the two bars before L. These up bars had narrow spreads, low, low volume, and closed in the middle or off the high. Also note the context at C. It was still in an uptrend and no real sign of weakness had yet shown itself. Look to the background first for the context to make a trade. At C, the context was still up. By G, we had run into higher time frame supply (referr to the 15-min chart), the Supply Line, ZZ, had been hit, indicating O/S, and the volume and bar characteristics at D and F indicated weakness. You had none of this at C.

Entry At F:

You can enter a tick below F and place a stop above its high. That works well. You can also sell on the close of F with a stop above the high.

Entries at G & H:

You can enter on a tick below or on the close - either is fine. I would personally place a stop above F on these entries and would look to move to break even as soon as the support line (along the lows of E & G) was broken.

Great questions!

Hope this is helpful

Eiger

Sanook · #6 02-03-2009, 04:09 PM

Thanks again Eiger, that has certainly cleared up bar C.

With regards to bar D, would we not short here as it is a down bar, and we only short up bars, or is there another reason?

And with regards to bar E, even though it appears to technically be no demand, the volume is certainly not as low as the volume is on the bars around 2. Is this why bar E is not the greatest choice either?

Bars D and F are something I've seen many times trading price action without volume. Enter on the break of the hammer at D with a stop above, only to be taken out by another hammer at F that eventually goes in your direction. It's this area around D,E and F that I hope VSA can help with.

Thanks.

BrunoHammerstorm · #7 02-03-2009, 04:37 PM

great analysis eiger....

we'll be seeing you in live chat to explain during real time live trading.

best

Sledge · #8 02-03-2009, 05:00 PM

Thank you sir, once again you are pushing the envelope of education on VSA and showing the world, how really very simple VSA can be. Wonderfully written and illustrated. Keep em coming!
Aaron

Eiger · #9 02-03-2009, 05:08 PM

Originally Posted by Sanook

....
With regards to bar D, would we not short here as it is a down bar, and we only short up bars, or is there another reason?

And with regards to bar E, even though it appears to technically be no demand, the volume is certainly not as low as the volume is on the bars around 2. Is this why bar E is not the greatest choice either?

Bars D and F are something I've seen many times trading price action without volume. Enter on the break of the hammer at D with a stop above, only to be taken out by another hammer at F that eventually goes in your direction. It's this area around D,E and F that I hope VSA can help with.

Thanks.

Bar D is a bit early in the process. This is just one bar that closed on it's lows. As they say, one swan does not a Capistrano make. In other words, there is not enough evidence that weakness has come into the market at D.

E shows a lack of professional interest, but not a great bar to short. Again, it's early. We need to let the market unfold a bit to be as clear as we can be that weakness has come in. Also, E dips below D and closed just off its highs. Lower prices were rejected here, and thus, this bar's action is saying that the odds for at least a little more rally are high. It is only after F that we are pretty certain that weakness is now dominating. G & H give the confirmation. F is an aggressive entry, G & H are solid entries.

Keep in mind that you really want to protect capital first and foremost. You absolutely cannot take every signal that comes up in VSA. If you do, you will be hurt. There is a definate art or craft to this business. The art is to see the bars unfold against a background condition that gives substantial weight to a change in trend. Only then do we take a trade. Pay attention to the background first and foremost. Let the bars unfold. Watch the volume as the key indicator. It must start out with a spike or a swelling in volume. When several price bars and their associated volumes add up to a change in trend, then look for a trigger, not before.

Hope this is helpful,

Eiger

Eiger · #10 02-03-2009, 06:12 PM

5-Minute ES for Feb 3, 2009 -- AM

A - UpThrust. Market opens at the high of yesterday afternoon (must know your background) on very high volume and closes down, well under yesterday afternoon highs - bearish. Next bar is down and market begins to fall. An aggressive trade is to short on the UT.

B - Market falls, but volume recedes. On B and the bar before B, closes are in the middle indicating buying coming in. Note the lack of progress on the lows from the bar before B and B. Next bar is up.

C - Market rallies and volume comes in on C, indicating buying.

D - As price comes back to the low at B, a lack of supply emerges.

E - Bottom Reversal, and bullish.

Note a higher low (from the yesterday afternoon low) is put in.

F - Market rallies to F where volume suddenly increases at the supply area from yesterday afternoon and today's open.

G - As the market reacts from the supply, it does so on receding volume. G is a Hidden Test and a location for a long.

H - Volume increases at the Globex high, close is in the middle, indicating likely supply.

I - No Demand.

J - Volume increases on this down bar after potential supply into a resistance area. This indicates supply coming into the market.

K - No Demand. Good location for a short. Next bar is down.

L - No Demand. The market is clearly struggling to stay above support (blue line). Another good location for a short. Next bar is down.

M - Another No Demand as the market attempts to rally (lackluster)

N - Volume swells and progress to the downside shortens.

Eiger