[VSA] Volume Spread Analysis Part II

[Sledge 13]

OK, I'm going to ask the $1,000,000 Question:

 

At a Market top, we know we generally have bars of Ultra High Volume with wide spreads.

Then we may see an "end of rising market" bar or we may not.

Additionally, we may also see upthrusts and no demand as the top peters out.

We may also be so lucky as to get a final upthrust into new high ground and know that the market is now ready to fall.

 

Since the markets don't always give us this "perfect" set-up to follow each and every time but we get the following scenario:

1. Wide Spread Bar Up with Ultra High Volume

2. No Demand Bar

3. Upthrust

4. No Demand Bar

5. No Demand Bar

Then the market starts to fall- and in a TIDAL wave of force, it comes crashing down.

 

THE QUESTION IS THIS: When do the professional money decide when "its time?" Does one big player take the leap and start the freefall and the rest "jump in?" During my studies of VSA, I have never been able to call with extreme confidence- this particular move. You can see market tops flounder for days, while other times, you may get one or two no demand bars and boom- the bottom falls out. Anyone here with any insight on this?

Sledge

[DbPhoenix 42]

There are a number of posts above addressing today's action, and there are a number of things that should be kept in mind.

 

First, we are at multi-year support. It's much better in the NDX than the SPX, but it's there nonetheless. Therfore, it should come as no surprise that there are going to be interesting times here.

 

Second, the market has been gliding into this area since the end of January. In fact, one could argue that the volume at the beginning of the hinge signaled preliminary support, if not a selling climax (volume was also decent at the beginnings of the same hinges in the SPX and DJIA).

 

Third, the hot poker today was news-related. If there was in fact accumulation going on in the underlying, the news may have sparked a response for which some of the bigger players may not have been prepared. Perhaps whatever accumulation was going on, if any, was supposed to go on longer. And it may well do so here (refer to the chart I posted earlier and note where we are with regard to longer-term S&R).

 

While it's always possible that we may head right back into the old zone, it's also possible we may establish a new, lower one here.

[Eiger 10]

I suspect that the "SOT" comes from SMI. Wyckoff's thrust was a short, sharp, and headfake move up, the opposite of a shakeout. What you're referring to is simply a secondary test or retest.

 

FYI

 

Actually, Db it is Wyckoff. He talks about shortening of the thrust in the case study of the NY Times Average of 50 Stocks during 1931. SMI may have later expanded on the concept, like they did in several areas.

 

Eiger

[mister ed 10]

You have some of it right, but there are other things going on in the chart. I made up a chart of SPY so you can see what I refer to.

 

In classic Wyckoff, markets don't turn on a dime. They need to first stop the down move, then build cause (i.e., allow for a period of accumulation). There is a sequence that markets often follow that Wyckoff identified. We saw it today. After a down move has been under way for a while, you will get a rally that will typically (not always) last longer and be larger than any previous rally in the down trend. This is called Preliminary Support and signals that we are getting close to the end of the down trend. If you are familiar with Elliot, think of it as the 4th wave.

 

Where you had the Selling Climax, was actually Preliminary Support. There was climactic action, but not really the SC. There was a secondary test (ST), but note that that ST still had a lot of volume.

 

Then, on the rally up you had a series of up thrusts at 1 and No Demand bars at 2. See how the volume was receding on the rally? You don't want that if you are looking for or in a long position. It means there is no momentum (professional buying) behind the rally. Thus, the market is weak. Contrast this with 3 on the chart. At 3, the bars were closing on thier highs and volume was increasing with the rally. Professional support was behind the move.

 

That first rally had nothing behind it and a minor Buying Climax (bc) occurred at resistance and the market fell back.

 

The Selling Climax came later with the heaviest volume on the chart. Two other tests occurred, and accumulation had apparaently been completed as the market then rallied vigorously.

 

Hope this helps.

 

Eiger

 

Eiger - thanks very much for this analysis, which you have obviously put a lot of work into, reproducing the chart etc. I, for one, find the way you have broken down the action and analysed it in terms of principles really valuable. Really helpful thank-you.

[DbPhoenix 42]

 

THE QUESTION IS THIS: When do the professional money decide when "its time?"

 

Long before the scenario you've provided. Money that is literally "smart" sells on the way up, not at the top. Volume in September was crap across all the major averages. This suggested to me that they were done. Some people called it a head and shoulders. I didn't because the volume pattern wasn't right. But the end result was the same.

[mister ed 10]

Long before the scenario you've provided. Money that is literally "smart" sells on the way up, not at the top. Volume in September was crap across all the major averages. This suggested to me that they were done. Some people called it a head and shoulders. I didn't because the volume pattern wasn't right. But the end result was the same.

 

Sledge, Db, I suppose the better way of putting the question is when does the mark-up or (in this case) the mark-down begin?

 

Sign of strength (mark-up), sign of weakness (mark-down) is the beginning, the 'jump over the creek' or the 'break of the ice'. Sorry for the jargon.

[DbPhoenix 42]

Actually, Db it is Wyckoff. He talks about shortening of the thrust in the case study of the NY Times Average of 50 Stocks during 1931. SMI may have later expanded on the concept, like they did in several areas.

 

Eiger

 

You are correct. He refers to "upthrusts" and "upward thrusts" a number of times, but he does use the term "downward thrust" once, referring to the end of April.

 

Drinks are on me

[Eiger 10]

Eiger - thanks very much for this analysis, which you have obviously put a lot of work into, reproducing the chart etc. I, for one, find the way you have broken down the action and analysed it in terms of principles really valuable. Really helpful thank-you.

 

Thanks, Ed. Glad you like these. I do this every night with my charts -- I annotate the entire day on the 5-min. I also indicate important areas and bars on the 3 & 10-min charts, too. I love this stuff, and I think that analyzing charts like this is great way to learn. You really do begin to see this stuff as it unfolds.

 

Eiger

[zeon 10]

Just like to say that I appreciate all the feedback everybody's giving eachother here and I am proud to be a member of this board with so many very knowledgeable traders. I'll let things sink in for the rest of the day before continuining my studies of Wyckoff.

[mister ed 10]

Thanks, Ed. Glad you like these. I do this every night with my charts -- I annotate the entire day on the 5-min. I also indicate important areas and bars on the 3 & 10-min charts, too. I love this stuff, and I think that analyzing charts like this is great way to learn. You really do begin to see this stuff as it unfolds.

 

Eiger

 

What I find in real-time is I am 'rushed' and often will miss things. This is a sign that I haven't 'absorbed' it yet (for want of a better word) as there are some parts of the analysis that come very quickly, those things which I have obviously absorbed already. Doing such an analysis, breaking it all down, and seeing it done by others too (such as your post) after the event helps to learn and absorb, I find.

[Eiger 10]

Drinks are on me

 

Great! I'll take a scotch :missy: Then the next round is on me.

 

Also look at the early January 1931 section where he talks about shortening of the upward thrust indicating a lessening of demand.

 

SMI probably expanded on this, though, as I think more about this. If I recall correctly, when they talk about trend lines, they use SOT in terms of swings or waves. This is in Unit 3, I think -- all the material that Bob Evans (mostly) developed. I think they call it the Basic Tapes.

[DbPhoenix 42]

Sledge, Db, I suppose the better way of putting the question is when does the mark-up or (in this case) the mark-down begin?

 

Sign of strength (mark-up), sign of weakness (mark-down) is the beginning, the 'jump over the creek' or the 'break of the ice'. Sorry for the jargon.

 

We're getting mired in jargon, which is why I try to avoid the SMI overlays.

 

There are four stages: accumulation, mark-up, distribution, mark-down. The mark-up phase begins when the accumuation phase is finished, though one could argue that it's the last act of accumulation. Distribution begins soon thereafter, while demand is still high for the shares (or whatever). It does not begin at the top. The top is the fumes. The mark-down phase begins after distribution, but some of it can also occur during the end stages of distribution.

 

These are not discrete stages, starts here on this day and ends on that one. What is most important is not to label everything but to detect the exhaustion, and this was abundantly clear in September. Look, for example, at the transports.

 

Now some people apply these terms to brief buying and selling forays that to me have little to do with accumulation and distribution, but I've stopped arguing about it. As long as people know how to detect imbalances in buying and selling pressure and the signs of buying and selling exhaustion, that's good enough.

[DbPhoenix 42]

Great! I'll take a scotch :missy: Then the next round is on me.

 

Also look at the early January 1931 section where he talks about shortening of the upward thrust indicating a lessening of demand.

 

SMI probably expanded on this, though, as I think more about this. If I recall correctly, when they talk about trend lines, they use SOT in terms of swings or waves. This is in Unit 3, I think -- all the material that Bob Evans (mostly) developed. I think they call it the Basic Tapes.

 

Yes, that was my point, that a thrust is fake, and one expects that sort of shortening as a sign of exhaustion.

 

As for anything outside of the original course, I don't get into it. I prefer to stick with Wyckoff's own work. For the same reason, I bought a copy of the 4th edition of Edwards and Magee, which is the last or next-to-last edition that Magee himself revised, and a first edition of Schabacker. Sometimes people do improve on work that isn't theirs. But more often they just muck it up.

 

In any case, the jargon doesn't seem to make things any clearer. Usually the opposite. And if one can work his way down to the most central principles, of which there are very few, he doesn't have to consult a list, much less a book, every time he has to make a trading decision.

 

At his best, Wyckoff illuminates what is in front of the trader, whether on the chart or on the tape. He doesn't massage it and manipulate it and impose a foreign language on it. He is as clear as crystal, and I've found that to be exceptionally rare in the world of trading.

[Eiger 10]

What I find in real-time is I am 'rushed' and often will miss things. This is a sign that I haven't 'absorbed' it yet .

 

I know what you mean. One thing I found helpful which I do is to do a quick annotation of each bar on a separate sheet of paper I have set up just for this. I write down stuff like this for each bar:

 

Volume - high/low/ave

Bar - up/down/level

Spread - wide/narrow/ave

Close - highs/lows/middle

Significance/meaning - see below

 

In significance or meaning, I jot things like higher high/higher low, no demand, test, up thrust, whatever seems meaningful at the moment etc.

 

I do this for a couple of reasons. First, it really improves concentration. Our minds naturally wander and we start thinking about all kinds of extraneous stuff during the day, so this brings you back to the market and makes you focus (I am a psychologist, too, so I think about these things!). Second, it's a good way to see where you are missing things. If I miss a move, I go back to the log and see how I was reading the market at that time. It is a good learning tool in that way.

 

I basically made a blank table in MS Word and fill it in for the 5 min chart during the day.

 

Eiger

[mister ed 10]

As long as people know how to detect imbalances in buying and selling pressure and the signs of buying and selling exhaustion, that's good enough.

 

I think what was the gist of Sledge's question (Sledge, correct me if I am wrong), he is detecting the buy and selling imbalances and exhaustion but notes that the price may then take off into the mark up/down phase, or either continue on more-or-less in a range?

 

Which is where the SOS or SOW and the JOC or break of ice becomes important (again, sorry for the shorthand or jargon).

 

Sledge, also there are possibilities of taking trades while it is still in the 'range' (the accumulation or distribution phases), again using Wyckoff analysis ... these trades are not as 'obvious' as the break of the range (the JOC or break of ice) but the risk/reward can often be much better. I say to try this like it is so many words ... but I find it very challenging and I imagine some others do too.

[DbPhoenix 42]

I think what was the gist of Sledge's question (Sledge, correct me if I am wrong), he is detecting the buy and selling imbalances and exhaustion but notes that the price may then take off into the mark up/down phase, or either continue on more-or-less in a range?

 

Which is where the SOS or SOW and the JOC or break of ice becomes important (again, sorry for the shorthand or jargon).

 

Sledge, also there are possibilities of taking trades while it is still in the 'range' (the accumulation or distribution phases), again using Wyckoff analysis ... these trades are not as 'obvious' as the break of the range (the JOC or break of ice) but the risk/reward can often be much better. I say to try this like it is so many words ... but I find it very challenging and I imagine some others do too.

 

Since we're not defining accumulation, distribution, mark-up and mark-down in the same ways, I'll exit the field regarding this particular aspect. Otherwise, confusion will reign.

[Sledge 13]

What is most important is not to label everything but to detect the exhaustion

 

Ok, now we're onto something. Ok so how do we finally tell when the distribution stage at a market top or an accumulation stage at a market bottom is exhausted?

 

In your experience- what is it you see when you say "OK Db, you saw it get tired and now- it has had it and it is time to pull the trigger on this trade?"

 

Sledge

[mister ed 10]

Since we're not defining accumulation, distribution, mark-up and mark-down in the same ways, I'll exit the field regarding this particular aspect. Otherwise, confusion will reign.

 

I may be off track with any definition I am making of acc, dist, mark-up or mark-down so sorry if I am causing confusion etc. Please go ahead with your comments Db.

 

I can't keep up with this thread. The great thing about my timezone is when you guys go to bed I get heaps of time to go through the posts in more detail and at a more relaxed pace, luxury!

[Sledge 13]

Ed and Db-

Ok, I would be interested in getting BOTH of your "take's" on the subject!

Db, I posted my question to you in a post- just as Ed must have been replying.

 

Ed-

I'd like to know more about your strategy as well. Yes I do mean that you see that ranging hell! My thought is, sort of like a ping pong ball bouncing between two spaces as the downward trendline gets smaller- the bounce gets into an even smaller range because the ceiling is lower (hope this makes sense)

My theory is that at the end of this range- it really has no where else to go but break the trendline- and head north.

 

Any validity to this?

Sledge

 

I think what was the gist of Sledge's question (Sledge, correct me if I am wrong), he is detecting the buy and selling imbalances and exhaustion but notes that the price may then take off into the mark up/down phase, or either continue on more-or-less in a range?

 

Which is where the SOS or SOW and the JOC or break of ice becomes important (again, sorry for the shorthand or jargon).

 

Sledge, also there are possibilities of taking trades while it is still in the 'range' (the accumulation or distribution phases), again using Wyckoff analysis ... these trades are not as 'obvious' as the break of the range (the JOC or break of ice) but the risk/reward can often be much better. I say to try this like it is so many words ... but I find it very challenging and I imagine some others do too.

[DbPhoenix 42]

Ok, now we're onto something. Ok so how do we finally tell when the distribution stage at a market top or an accumulation stage at a market bottom is exhausted?

 

In your experience- what is it you see when you say "OK Db, you saw it get tired and now- it has had it and it is time to pull the trigger on this trade?"

 

Sledge

 

You're mixing the market's accumulation/distribution cycle with the comparatively trivial buying and sellling cycles that take place on many timeframes from seconds to weeks.

 

Do you want me to show you what you should have been sensitive to last September, or do you want to know how to tell when it's time to exit a long or short trade? If the latter, review the posts that Eiger made to Zeon (299).

[mister ed 10]

You're mixing the market's accumulation/distribution cycle with the comparatively trivial buying and sellling cycles that take place on many timeframes from seconds to weeks.

 

I for one am more interested in the trivial buying and selling cycles! What sort of analysis and terms would you apply to these? I must admit I would refer to these as accumulation. and distribution etc. I look at accumulation/distribution/mark-up/mark-down across various scales, including on a day-trade scale (I might term 20 minutes activity, or whatever, as accumulation at that scale) which is where the confusion you mentioned might lie.

[Eiger 10]

For fun, here is the full SMI/Wyckoff analysis of today:

 

Creek - The area where supply had come in at the top of the accumulation area. There is often (as there was today) a minor and a major creek.

 

JAC - Jump Across the Creek - A Sign of Strength as the market breaks through the oppositional supply.

 

LPS - Last Point of Support. A testing area that the market makes, usually in the same area as Preliminary Support.

 

BUEC - Back Up to the Edge of the Creek - Typically after the jump, the market comes back to test the jump area. If successful, higher prices can be expected. However, the market can also fall back into the creek (i.e., head south and resume accumulation or fall into a downtrend).

 

The Creek story was developed by Bob Evans, a successor of Wyckoff, to explain how the market breaks out of an accumulation area. It was about a boy scout looking for a narrow enough place to get across. It is a helpful metaphor to understand certain market action, nothing more.

 

Please note this is a 5-minute chart. Just because the market jumped out of accumulation doesn't mean were are going to retest last year's highs!

 

Eiger

[DbPhoenix 42]

I for one am more interested in the trivial buying and selling cycles! What sort of analysis and terms would you apply to these? I must admit I would refer to these as accumulation. and distribution etc. I look at accumulation/distribution/mark-up/mark-down across various scales, including on a day-trade scale (I might term 20 minutes activity, or whatever, as accumulation at that scale) which is where the confusion you mentioned might lie.

 

That's not what I consider to be accumulation/distribution. It's not important enough. But if it works for you, that's great.

 

Jargon is supposed to serve as a shortcut, but also as an aid to communication. Without it, medicine, for example, would be in a world of trouble. And if one is working alone, he can use whatever terms he likes (calling shooting stars "spindles") as long as they help him with his trading.

 

But when you mix together Market Profile and VSA and TradeGuider and Wyckoff and Evans and Williams (both pre and post-TG) and Market Delta and SMI, for a start, you've got an awful lot of jargon, much of it conflicting, and communication and clarity get the short straw.

 

Therefore, I try to avoid jargon whenever and wherever possible, which is one of the reasons why I, for example, use "buying pressure" and "selling pressure" rather than demand and supply. They more accurately characterize what's going on and elaborate definitions are not required.

 

So, as far as the shorter cycles go, I'd refer you as I did to Sledge to Eiger's post 299. Excellent job. The only thing I bring to the party is the addition of support and resistance, so that I know when what appear to be reversal signals probably really are reversal signals and not just bored traders looking for something to do.

[mister ed 10]

For fun, here is the full SMI/Wyckoff analysis of today:

Eiger

 

Would it were possible for me to click the "Thanks" button more than once a post! This is of great value thank-you Eiger.

 

Sledge - this might be (really, it is) helpful with your 'where/when' to enter question?

 

I particularly like the 'creek' as a non-straight line. There are various articles around the net (Hank Pruden the writer of many of them) that show this, great to see it brought to life. I am no expert in this stuff, but a few things are obvious to me - the jump across the minor creek, look at the volume. Was it Evans/Pruden who defined the creek as 'where the volume comes in' - it may not have been - but this is a great example.

[Sledge 13]

I for one am more interested in the trivial buying and selling cycles! What sort of analysis and terms would you apply to these? I must admit I would refer to these as accumulation. and distribution etc. I look at accumulation/distribution/mark-up/mark-down across various scales, including on a day-trade scale (I might term 20 minutes activity, or whatever, as accumulation at that scale) which is where the confusion you mentioned might lie.

 

Db-

I would agree with Ed in my questioning. I would want to know more about the trivial buying and selling cycles. My question would lie in say the Top of a Wave 1 Bull Trend. Where the longterm (Months) outlook is Bullish, but you will see a re-trace to do a multitude of things (trap the herd, take profits etc.)

 

Am I correct in saying that you would define Accumulation as the professional money accumulationg longs at the end of a Bear Cycle ready to distribute at a later time and higher price in the Bull Cycle.

Sledge