Volume Spread Analysis

[bunny]

I am posting VSA of the same chart(PRAJIND) as posted by lazytrader.

Things to observe:
1. The mid-July support at 70
2. Towards the left, there is a trading range in 70s in first half of May.
3. The volume in (1) and lower than that in (2).

Together, these 3 points mean that the selling pressure is decreasing* and about to vanish. Now which day exactly it would stop is most likely indicated by the two down bars on decreasing volume.

* = "Master the Markets" Taking a Professional Approach to Trading & Investing by Using Volume Spread Analysis - Tom Williams.

 

[bunny]

Just checking charts of RNRL and Rpower and looks like there is distribution in all three. Can someone confirm?

RNRL - May make a upmove soon as it in an area of strong support.
RPOWER - Perhaps the distribution and markdown have been already completed.

 

[bunny]

Can we consider pullbacks(with price moving in a definite direction) as sign of accumulation or distribution? Consider the below scenario:

Accumulation: (See ADLABS attached chart)
The price leaks above the resistance line(the highest price smart money-SM is willing to pay for the stock). As soon the price goes above the max. bid price, the SM is not interested in buying it at that levels. So buying stops and volume fall until prices enter below the resistance line. Once it enters the bid range, buying picks up and volume increase!

Distribution:
The price breaches a support level and selling stops until price comes back into the range. Reduced selling is reflected as less volume. The price slowly picks up and enters the range where selling again resumes!

This is the same thing as "A breakout above resistance level with low volume is a false breakout".

 

[bunny]

One more distribution illustration: Please see the attached daily chart of IFCI during Jun 2009. I wanted to illustrate distribution.

The stock is in an uptrend. Smart Money (SM) wants to distribute it to take its profit. So it starts distributing now. At this point, we don't know in how many "batches" it will sell its stock. Soon, it sells its first batch and creates R-1. The drivels the price a bit lower than the minimum ask price of the SM. So it stops selling temporarily(and creates S-1) and allow price to rise. Once it approaches the desired price, the next lot is sold and R-2 is created. Again the price falls below the min. ask price, so selling is temporarily stopped(and S-2 is created) and the price is allowed to rise again to the ask price range. Once it increases, the next "batch" of selling resumes, thus creates R-3.

After the price is coming down after R-3, it reaches area of support - prices which are very close to S-1 and S-2. But this time the support range is breached on high volume. This indicates selling pressure!

The above was quite basic.

Now some important observations:

1. Volume increases near resistance.
2. Volume decreases near support.
3. When the price approaches the support zone, volume also reduces along with price (reduced selling pressure near support)
4. On S-2, the volume is higher than that on S-1. This means that there is increase in selling pressure pressure at the same support price.
5. The drop from R-3 to S-3 is on high volumes. Down-bar on higher volume always indicates selling.
6. In the next session, SM refused to buy the stock near S-3 and allowed it fall. This means that SM has no more interest in higher prices. This inturn means that SM has completed the distribution and walked away with the cash!

 

[bunny]

(In Accumulation)Third, the volume should shrink near the support line and expand near the resistance line.

Hi Karthik Sir,
I think that the volume should shrink near resistance and expand near support in accumulation.

My thinking behind this is:
Since the SM is buying, it will look for buying at the lower end of its bid price range. Thus when the price goes upwards towards the upper end of the bid price range, the SM will temporarily stop buying. This inturn will be reflected on charts as shrunken volume. Then when the price drop lower, the SM will resume its buying. This will be reflected as expansion of volume.

What you have mentioned seems apt for distribution rather than accumulation.

Finnaly, the breakout in either direction will occur in either direction when

• SM stops resisting the increasing price(in accumulation)
• SMstops supporting the falling price(in distribution)

Please correct me if I am wrong.
Thanks,
-Bunny.

 

[karthikmarar]

Bunny

what you said sound very logical , isn't it?

Let us look at this with a different angle....

As the SM accumulates the volume increases and the price also moves up. When the price reaches the top of the TR the SM has to prevent the stock breaking out of the range. Normally SM may even resort to some selling inorder to keep the price below the TR top. So you will find many wide ranging down bars at the top of the range. Then the price starts falling. the SM would not support the down move otherwise shorts build up and this may take the price well below the TR. As the SM steps aside you will find lower volume and lower spreads. When the price reaches bottom of the TR te Sm will start buying again. So you will find upbars with higher volume at the bottom of the range. That is why the volume shrink near supports and expands resistances.. This logic looks a little strange but that is the way it works

For a practical example, let us look at the Accumulation phase for the NIFTY from November 2008 to march 2009... You can notice volume expands as the NIFTY approaches the resistances and shrinks as it approaches the support

 

[bunny]

Thanks Karthik Sir for the wonderful explanation. I was waiting eagerly for your reply. I still have some doubts but I will try to solve in light of historical data and come again.

So basically the idea is to not make it obvious that they are accumulating(or distribution). Reminds me of what Chakanya said, "A snake should pretend to be venomous even if it is not".

Thanks,
-Bunny.

 

[abhinkoi]

I am posting VSA of the same chart(PRAJIND) as posted by lazytrader.

Things to observe:
1. The mid-July support at 70
2. Towards the left, there is a trading range in 70s in first half of May.
3. The volume in (1) and lower than that in (2).

Together, these 3 points mean that the selling pressure is decreasing* and about to vanish. Now which day exactly it would stop is most likely indicated by the two down bars on decreasing volume.

* = "Master the Markets" Taking a Professional Approach to Trading & Investing by Using Volume Spread Analysis - Tom Williams.

It makes perfect sense in this trade to buy at those levels where selling pressure is reducing...2 consistent down bars with volumes decreasing and the price on 2nd bar should be closed in the middle or on the upside of the bar...

This seems to be a very interesting topic and I am still learning so pls let me know if we are on the same page...or if Iam missing something?


thx
Abhinav

 

[observer]

This is great knowledge shared by you Karthik. Thank you very much!

One view I cannot understand is the No Demand test. What is the logic?
If there is no demand at the high after a thrust, means be ready to close long? And if the test fails, then what could be the next move?

Thanks

 

[arti]

Hi Karthik,

I read all the posts as well as some part of williams book. I have the afl written by u. I have a basic question: -

Usually whats the time period we look backward to understand whats happening? Is one or two month or weekly enough to come to some conclusion about ongoing activity of SM? Mind me, if its a silly question, still in learning phase and have lots of confusion also so......