[VSA] Volume Spread Analysis Part II

[tawe trader 10]

Here's a long trade that I took yesterday afternoon on the 15 min FTSE Future.

 

My main timeframe is 15 min but I also have open 7 min (1/2 of the 15) 10 min and a 60 min timeframe for overall trend. I also check the daily each night.

 

Chart #1

 

At 14.15 (white arrow) we have a wide spread downbar, down into the lowest point of the day and the highest volume since the opening bar at 8am. The close is off the low. The next bar closes up.

 

14.45 - Test bar (green arrow), there is less volume than the previous two bars, the FTSE makes a new low (by 1 pt) but closes in the upper portion of the bars range.

 

I went long at 5478 a couple of seconds before this 15 min bar finished.

 

Chart #2

 

The mkt moved up to resistance and I quickly had a 12 pt gain but I held on, looking for a decent rally but the mkt turned down and things didn't look to good. I got out for a 13 pt loss just before the mkt tanked !!!

 

The lesson here is one of impatience, I didn't wait for the test bar to be confirmed before entering. VSA didn't fail in this case, I did by being too quick to enter. If I had waited another 15 mins to see if the next bar closed up I would have seen that it didn't and wouldn't have gone long. :crap:

 

In hindsight this was a good place to go short, a failed test is a sign that the mkt is still weak.

 

Tawe

[CandleWhisperer 10]

TAWE;

 

Interesting. These two charts bring up a major sticking point for some: patience.

 

If you have heard Todd speak, he says a "test" bar is NOT an actual test bar unless or until one of the next two bars closes up and higher than the close of the possible test bar. In other words, at the time you took the trade the bar was only a possible test. Two bars later (30 mins) we still see no successful confirmation of the test. To be sure this is a failed test and signifies weakness rather than strength. A lot of people do not like waiting for confirmation, but do wait for the close of the bar itself. Thus, I would say that you were to early because you do need to wait for the bar to close.

 

Let's back up to the first bar (white arrow). We have high volume on a wide spread down bar that closes off the low with the next bar up. As you stated, demand must of entered here (strength). VSA 101: strength enters on down bars and weakness enters on up bars. But take a look at the next bar. It does indeed close up, but it fails to make a higher high. It also has a narrow range and decreasing volume. Not a very strong bar. There is pressure keeping the range small and the change minimal: supply. Hence the market tests to see if that is indeed the case.

 

If you look at the first bar after the possible test bar, you see a bar that makes a higher high on higher volume, closes lower than the previous bar and closes near its lows. This is an Upthrust. It is also a form of squat as we have higher volume on an equal range bar. (I am just "eyeballing it so I could be wrong on that). Now we are three bars after our high volume down bar and price has gone nowhere but sideways. The demand that entered is being swamped by supply. This market is weak.... The very next bar closes below the low of the test bar. Failed test. Sign to get short.

 

This is after the fact, but I hope it helps. For what it is worth, my main recommendation is that you need to wait for the current bar to close before taking action, or at least drill down to a lower timeframe and trade on the close of that interval's bar.

[tawe trader 10]

Thanks CW for dissecting things a bit more and yes in hindsight there was a fine upthrust to short.

 

I thought I'd post a recent losing trade of mine to highlight the fact that even though VSA as a technical method in IMHO is very good but without discipline / patience we are just gambling and not trading.

 

It's that old human weakness element thing again. In this case I thought I'd 'jump-the-gun' and get in at a reasonable price level instead of waiting another 15 mins for the 'test' to be confirmed and the mkt possibly higher - greedy ol' impatient Tawe :doh:

 

There will be VSA trades that are entered according to the rules (after successful tests) that still fail but that's why we need to use stops.

 

If VSA worked 100% of the time then TG wouldn't need to travel around the world trying to sell any of their software. They would trade their own accounts from a sunny island whilst sipping cocktails ................

[omit46 10]

Hi,

I am just a noob in VSA. I am very interested in learning vsa. But before I dive in I want to know if it applies to the eod data of the market I trade in. Below is the chart of a stock I know for a FACT that has been manipulated. But can vsa be used in this case to explain? all the vsa experts on the forum here, can you guys SEE the trends/rally's before they take place?

[Eiger 10]

Hi,

I am just a noob in VSA. I am very interested in learning vsa. But before I dive in I want to know if it applies to the eod data of the market I trade in. Below is the chart of a stock I know for a FACT that has been manipulated. But can vsa be used in this case to explain? all the vsa experts on the forum here, can you guys SEE the trends/rally's before they take place?

 

Using VSA, you can generally see the odds for a rally to take place.

 

Your stock is very readable. VSA works well in both EOD or intraday time frames, as well as higher time frames.

 

The initial rally on your chart into mid-March showed good expansion of volume on the rally. Individual down days in this period showed volume immediately recede, confirming strength.

 

From mid-March into early April, the stock held its gains and volume receded. There was probably an old resistance area to the left (not seen on this chart) and the stock was absorbing any residule supply before moving up. There was a choice Test at the very end of this period.

 

In June-July, after moving up well on rallies, this stock reacted. Note the daily spreads on this reaction were larger than the spreads on the prior two reactions. However, as the stock reacted with larger daily ranges, the volume told a different story. It was drying up. This was a Shaking Out of traders who got long on the earlier rallies by the professional traders.

 

This was followed by a very nice rally with daily bars having wide spreads and volume expanding well indicating this is a true breakout for higher prices. (After shaking out and aquiring whatever stock could be acquired by driving the stock down, professional traders did not want to have to buy from traders with poor positions who had gotten long at the top of the April and May rallies, so they pushed the stock up very rapidly, encouraging those traders to stay long.) After price broke above resistance, it gave an immediate Test and confirmed the bullish behavior (the first down bar in the rally).

 

At the very end of the chart there is some supply coming in, so you would expect another reaction here. How the stock reacts would tell you the odds for future behavior, but through the end of this chart, this stock still looks overall bullish.

 

Each market and each time frame has its own individual characteristics. Things tend to unfold more slowly on the daily than the 5-min chart, for example. Nevertheless, VSA is equally applicable to the daily and to the 5-min charts, as you can see.

 

Hope this is helpful.

 

Eiger

[Eiger 10]

Hi CW - great to see you back! Where have you been? We all missed you.

 

Re: Tests. The best tests are actually down bars, i.e., the close is lower than the previous bar. They can be inside bars, and the close is less important than the low, low volume we want to see as the market is marked down. This indicates no selling pressure. You are right, the ideal Test closes mid-range or better.

 

Welcome back. I look forward to your posts.

 

Eiger

[tawe trader 10]

If VSA worked 100% of the time then TG wouldn't need to travel around the world trying to sell any of their software. They would trade their own accounts from a sunny island whilst sipping cocktails ................

 

I regret saying this, I shouldn't be negative and stoop to Tradeguider bashing, they haven't done me any harm.

 

----------------------------------------------------------------------------------------------------------

 

Going back to my earlier post, my losing trade, I hope I expressed the fact that it was not VSA that failed in this instance but ME by not sticking to the VSA entry rules.

 

Tawe

[omit46 10]

Using VSA, you can generally see the odds for a rally to take place.

 

Your stock is very readable. VSA works well in both EOD or intraday time frames, as well as higher time frames.

 

The initial rally on your chart into mid-March showed good expansion of volume on the rally. Individual down days in this period showed volume immediately recede, confirming strength.

 

From mid-March into early April, the stock held its gains and volume receded. There was probably an old resistance area to the left (not seen on this chart) and the stock was absorbing any residule supply before moving up. There was a choice Test at the very end of this period.

 

In June-July, after moving up well on rallies, this stock reacted. Note the daily spreads on this reaction were larger than the spreads on the prior two reactions. However, as the stock reacted with larger daily ranges, the volume told a different story. It was drying up. This was a Shaking Out of traders who got long on the earlier rallies by the professional traders.

 

This was followed by a very nice rally with daily bars having wide spreads and volume expanding well indicating this is a true breakout for higher prices. (After shaking out and aquiring whatever stock could be acquired by driving the stock down, professional traders did not want to have to buy from traders with poor positions who had gotten long at the top of the April and May rallies, so they pushed the stock up very rapidly, encouraging those traders to stay long.) After price broke above resistance, it gave an immediate Test and confirmed the bullish behavior (the first down bar in the rally).

 

At the very end of the chart there is some supply coming in, so you would expect another reaction here. How the stock reacts would tell you the odds for future behavior, but through the end of this chart, this stock still looks overall bullish.

 

Each market and each time frame has its own individual characteristics. Things tend to unfold more slowly on the daily than the 5-min chart, for example. Nevertheless, VSA is equally applicable to the daily and to the 5-min charts, as you can see.

 

Hope this is helpful.

 

Eiger

 

Thank you for the wonderful analysis. One thing I am confused about, the rally that started in july, does the accumulation takes place at the starting volume spike of the rally or during that low spread price range from mid june to july?

 

In general, Would you say vsa is more helpful for intraday or eod?

I trade in bangladesh stock market and the stock here matures after 3 days after buy date. So, I am guessing if professional buyers accumulate on a volume-spike day, the price should continue going up at least for 2 more days.

[mister ed 10]

So much for the thread quietening down, more excellent work.

 

I found some info elsewhere from a very knowledgeable Wyckoff trader and thought I would copy the link in here as it relates very closely to VSA.

 

I found the info at aussiestockforums.com, do a search for 'The Wyckoff Method' thread. (The specific link is in post 71, but all of the posts from 'motorway' are of excellent quality for those wanting to learn Wyckoff analysis).

 

The link is at:

http://www.wyckoffstockmarketinstitute.com/wyckoff_articles/Wyckoff_Articles/price_vol_relationships.htm

Edited September 6, 2008 by mister ed

[CandleWhisperer 10]

Hi,

I am just a noob in VSA. I am very interested in learning vsa. But before I dive in I want to know if it applies to the eod data of the market I trade in. Below is the chart of a stock I know for a FACT that has been manipulated. But can vsa be used in this case to explain? all the vsa experts on the forum here, can you guys SEE the trends/rally's before they take place?

 

Just a few things I see.

 

VSA does make the case that markets (and individual stocks) are manipulated. However, if you feel this is a highly manipulated issue (with an extremely small float) you might do better to stay away. And if you know for a fact that there is insider trading then stay away.

 

With that said VSA can be used on any freely traded instrument......

[Eiger 10]

... One thing I am confused about, the rally that started in july, does the accumulation takes place at the starting volume spike of the rally or during that low spread price range from mid june to july?

 

 

The main accumulation for this stock was likely started sometime prior to February. The resting periods and reactions seen on this chart could be additional accumulation. In a typical stock scenario, the range from mid-June to july would tend to confirm a larger accumulation area (that I would expect to see prior to February). In point & figure charting terms (which is highly useful in identifying accumulation/distribution), this confirmation would be called a "stepping stone count." It is a concept that comes from Wyckoff, and can be quite useful in trading.

 

Accumulation is the specialty of the professional trader. Accumulation means to buy as much stock as possible without putting the price up against your own buying. At some point, the available supply of stock will be exhausted and accumulation will be completed, allowing for the mark-up phase and higher prices because resistance (selling) into higher prices has now been removed. Accumulation occurs sometime after a bear market has occurred and where price is at a point viewed as attractive to professional traders.

 

Although professional traders are buying on the start of the rally (as we can see by the increased voilume and wide spreads of the price bar), accumulation does not start there. Their purpose was to mark price higher, not accumulate stock.

 

As a general rule, high volume on up bars indicates the potential for supply to be swamping demand. (I'll do a separate post on this later.) In this case, the high volume and wide spread indicates a rapid mark-up through the overhanging supply of the trading ranges to the left. We can know this because of the background of the trading range to the left and the low volume on the most recent reaction. Even though there has been a shaking out, there are still trapped longs holding on. This rapid advance is designed to push price up and through the levels of the resistance to encourage those trapped longs to hold on and not sell into the buying -- the professional traders do not want to be accumulating more stock at high prices; it is too expensive for them and, therefore, bad business.

 

Tom Williams laid out the steps for anayzing a market in his outstanding book, The Undeclared Secrets of the Stock Market, as follows:

 

1. Determine the phase of the market
   
2. Assess the relative volume
   
3. Assess the activity on that volume
   
4. Determine the direction and movement of the current price action
   

Note that the very first step in market analysis is evaluating the phase of the market. This is what we call the "background" in VSA, or market context. Those who seem to consistently fail to understand VSA consistently miss this step. They go right to the price action (which is not even the second step!) Always look first at the background and phase. Here we have a bullish mark-up phase and a low volume reaction within that phase in July. The next logical movement we can expect would be a drive to higher prices. We can see that unfold next with higher volume, wide spread up bars closing on their highs, moving price up, through and above the old tops in April & May.

 

Hope this is helpful.

 

Eiger

[Eiger 10]

I found some info elsewhere from a very knowledgeable Wyckoff trader and thought I would copy the link in here as it relates very closely to VSA.

 

I found the info at aussiestockforums.com, do a search for 'The Wyckoff Method' thread. (The specific link is in post 71, but all of the posts from 'motorway' are of excellent quality for those wanting to learn Wyckoff analysis).

 

The link is at:

http://www.wyckoffstockmarketinstitute.com/wyckoff_articles/Wyckoff_Articles/price_vol_relationships.htm

 

I couldn't agree more. Motorway has a true understanding of Wyckoff. And, he is not trying to sell you "his" version of it or be your guru. I have never met him, but I do have enormous respect for his understanding of Wyckoff and his ability to discuss and articulate the method in the context of the current markets. People interested in the Wyckoff method would do themselves a big favor by studying Mr. Motorway's work.

 

Here is a link to his Wyckoff thread:

 

http://www.aussiestockforums.com/forums/showthread.php?t=10020

 

There are many other Motorway posts on individual stocks on the Aussie Stock Forum that are also quite worthwhile reading and that you can find with a search.

 

Eiger

[CandleWhisperer 10]

Very interesting stuff here.

 

There is some pretty advanced stuff going on in this chart. Actually, advanced might not be the correct word. I think subtle is more appropriate.

 

I did not label the various candles but I will be starting on the left and moving right.

 

(1) The first candle is very important to VSA. VSA states that the BB will use news events to manipulate the market. This candle was created @ 0835 on Thursday. That means it started at 0830 and ended @0835. There was a news release @0830. Thus this is the bar created on the release of the news. Notice the Ultra High volume. We have a wide spread down bar on ultra high volume that closes off its lows. If all the volume represented selling, then the candle should not close off its lows. There must be some buying going on in there.

 

Of course, we need to mention that this candle is a WRB. Thus this candle sets up the Supply/Demand Delta (change) Zone. As I have said many times, this area is the optimal location to target trade entries. More broadly, it is the optimal location to see changes in the underlying supply/demand dynamics in the market. We keep that in mind as we move forward.

 

(2) Things start to get tricky. This bar closes down from the previous bar. As we have determined that there was some buying on the previous candle, we would expect this candle to close up. But wait, it is not that simple. This candle forms a Long Shadow. From a VSA perspective, the candle is wide spread closing in the upper portion of its range on very high volume. Although less than the news candle previous. Simply, there must of been buying on this candle as well. If there was more selling then the close should be lower. Note that the next candle does close up.

 

The next candles I want to talk about are really the reason for the post.

 

(3) Having seen buying on the first candle and buying on the second candle, we now see a candle that makes a lower low and closes on its high. This candle is trading into the High volume area created by the second candle. The long shadow area to be exact. But we must ask ourselves, "what is going on with the volume?". Note that it is less than the previous candle but it is not all that low.

 

"All testing (down during the day to close on the highs, on low volume) is usually a sign of strength. If the volume is not low, then it shows us that there is usually some selling(supply) present. Rarely will a market go far with supply in the background [b/]...." Master the Markets,Tom Williams, P. 158

 

So the market may rise but the rise should be short-lived if the test was on high volume. This was high volume.

 

(4) Price does move up a bit. Notice that price is moving into the WRB Supply/Demand Delta Zone. Now we get another candle where price moves down then closes near its high. Of note is that the move down, takes price out of this zone and thus disqualifies it as a signal candle for me. That point not withstanding, check out the volume. It is lower than the volume on the first test candle, but higher than the volume on the previous bar. Still not a good sign for a test bar.

 

(5) This is the key test candle. As we would expect, the candle makes a lower low than the previous candle and then closes near its high with a narrower range than the previous candle as well. We are in the "right" location. That is, the entire candle is within the body of our significant WRB. But look at the volume. It is less than the previous two candles, but very high. In fact, off the tree tests, this one has the most volume.

 

"Generally, a potential failed test will be accompanied by high volume, which indicates that supply is still present..." Master the Markets, Tom Williams,P. 158

 

Simply, the market is testing for residual supply and finding it. Notice that the next three candles do not close higher than the close of the test candle.

 

(6) All bets are off. With the appearance of a Dark WRB that closes below the last test candle, we know the market is weak. Actually, the high volume test candle within the Supply/Demand Delta Zone told us the market was weak. This WRB only confirms it.

[winnie 10]

I would like to ask you what kind of volume do you think it is good for a test. If volume is so big (bigger than average ?) , you will say there is still supply in it. Do you mean you need a very low volume (lower then average ?) ? How do you distinguish between a spring and a test ? They both seem to be a hammer pattern in candlestick chart.

 

Thanks

[Eiger 10]

How do you distinguish between a spring and a test ? They both seem to be a hammer pattern in candlestick chart.

 

Thanks

 

Hi Winnie,

 

Nice to see you back

 

Springs vs Tests

 

Springs are not really a VSA term, but come from Wyckoff. Bob Evans, the director of the Wyckoff Stock Market Institute during the 1940s-1960s, created the concept of the Spring. It is one of my favorite trades when it sets up properly, which i will talk about. My trading mentor also loved Springs and always said, "You could make a good living just trading Springs." In many ways, it is like the reverse of the Up Thrust.

 

A Spring dips under the low of the last low and closes back above the low, either on the intial dip or within a bar or two after that. You should see the market rally away from the danger point (the lows) soon thereafter. Although many Springs are tested, some rally immediately. Like the reverse of an UpThrust, Springs both test the supply under the lows and clear the stops of weak longs.

 

A Test is a dip back into an area of high volume showing supply has dried up and the path is clear for a rally of some degree.

 

------

 

The attached chart is the 5-min ES and shows: a Spring, the test of the Spring, and a couple of Tests (not too shabby, eh? )

 

The market prior to A is in a downtrend.

 

A - At A we see climactic action. Volume expands markedly and suddenly. Price has accelerated, and at bar A, the close is above the middle. Next bar is up.

 

B - The Spring. Price dips under the low at A and then closes above that low. Next bar is up. Note that the volume is less on the Spring (at B) than at A.

 

You want to see lower volume on the Spring. The lower the volume, the stronger the Spring and the greater the odds that it will rally immediately. On this Spring, however, volume is still a bit high (above average) indicating some supply remaining at this level. This Spring also has a fairly wide spread, indicating activity.

 

C-D - Because of the above average volume on the Spring, the market tests the Spring. The small reaction from C-D shows narrower spreads (compared to those at A & B) and much less volume, i.e., volume does not expand much as the market moves lower. The bar at D is a Hidden Test (it dips under the low of the last bars in the reaction and closes above and near its high).

 

E - Just to make absolutely certain, the market makes a Test at E. Tests are always down bars (best when they close mid-range or better) and have low volume. Note the volume at E is less than average. E has dipped back into the high volume area at A & B and shows no supply left on the mark-down. The market immediately rallies vigorously.

 

As a general rule-of-thumb, tests are considered to have significantly low volume when the volume on the test bar is less than the previous two bars, as it is here at E.

 

F - Another Test occurs at F. This is classified as a Test in a Rising Market, but has the essential characterisitics of a Test: down bar, narrower spread (compared to the bars on the rally from E), and volume less than the previous two bars indicating no supply is coming in (as the market runs into the small congestion area to the left). In this Test, the close is a little above mid-range, as well. The next bar is up

 

Keep in mind that Springs, like Tests, should be considered only when there is strength in the background. Here, we had the strength of the Selling Climax. Another clue that this Spring would turn the market was the length of the rally between A & B. I often look for the longest and/or largest rally in the downtrend to indicate the end of the downtrend. Wyckoff noted this characteristic as a sign of strength in his tape reading course.

 

----

 

So, on one chart we have the stopping action of a Selling Climax, a Spring to clear stops and test for supply below the low of the SC, a test of the Spring because volume was a bit high (so there was some remaining supply found), a Test, and a Test in a Rising market.

 

 

Hope you find this useful.

 

Eiger

[CandleWhisperer 10]

I would like to ask you what kind of volume do you think it is good for a test. If volume is so big (bigger than average ?) , you will say there is still supply in it. Do you mean you need a very low volume (lower then average ?) ? How do you distinguish between a spring and a test ? They both seem to be a hammer pattern in candlestick chart.

 

Thanks

 

Hi winnie. As far as distinguishing a spring(Wyckoff) from a test(VSA), both of us need to hear from a Wyckoff expert. From a VSA perspective there are no springs. It does appear that they are pretty much the same thing, however.

 

Be careful about thinking of the test as a hammer line. While it is true that the best test bars appear as hammers, or dojis where the open and close are on the top of the candle, VSA doesn't actually look at the open of the interval. Therefore, there is no way to tell if you have a hammer or a doji or any other candle line. Simply put, Tom would be looking at bar charts without the open included in the interval. Hence you would have only close and high-low range. As such one could not tell if there is a hammer or even a WRB for that matter.

 

With respect to volume, there are two ways that volume is interpreted: relative and absolute. We would like the volume on a test to be relatively low. That would mean less than the previous two bars. We can call that volume low as it low relative to the two previous volume bars. We can also stretch that out. For example, if there is a candle with a volume bar that is larger than any other volume bar you can see on the chart, then it would be considered very high to ultra high volume on a relative basis.

 

The second way is absolute. While we don't actually need to know the exact number, we can look at an individual bar and determine if it is a lot of volume based solely on the height, or lack thereof, of the volume bar itself. This idea is a bit easier to see through the way TG has their volume tool. As the volume bar moves into certain color levels, the volume becomes greater and greater on an absolute basis.

 

Hope that helps. Thanks for the question. This was the point of the post: various volume levels on tests candles and how markets react to them. One test bar was relatively low, but high on an absolute basis. One was not low on a relative basis, but lower in absolute terms. And one was neither low on a relative basis nor on an absolute one.

[CandleWhisperer 10]

Hi Winnie,

 

Nice to see you back

 

Springs vs Tests

 

Springs are not really a VSA term, but come from Wyckoff. Bob Evans, the director of the Wyckoff Stock Market Institute during the 1940s-1960s, created the concept of the Spring. It is one of my favorite trades when it sets up properly, which i will talk about. My trading mentor also loved Springs and always said, "You could make a good living just trading Springs." In many ways, it is like the reverse of the Up Thrust.

 

A Spring dips under the low of the last low and closes back above the low, either on the intial dip or within a bar or two after that. You should see the market rally away from the danger point (the lows) soon thereafter. Although many Springs are tested, some rally immediately. Like the reverse of an UpThrust, Springs both test the supply under the lows and clear the stops of weak longs.

 

A Test is a dip back into an area of high volume showing supply has dried up and the path is clear for a rally of some degree.

 

------

 

The attached chart is the 5-min ES and shows: a Spring, the test of the Spring, and a couple of Tests (not too shabby, eh? )

 

The market prior to A is in a downtrend.

 

A - At A we see climactic action. Volume expands markedly and suddenly. Price has accelerated, and at bar A, the close is above the middle. Next bar is up.

 

B - The Spring. Price dips under the low at A and then closes above that low. Next bar is up. Note that the volume is less on the Spring (at B) than at A.

 

You want to see lower volume on the Spring. The lower the volume, the stronger the Spring and the greater the odds that it will rally immediately. On this Spring, however, volume is still a bit high (above average) indicating some supply remaining at this level. This Spring also has a fairly wide spread, indicating activity.

 

C-D - Because of the above average volume on the Spring, the market tests the Spring. The small reaction from C-D shows narrower spreads (compared to those at A & B) and much less volume, i.e., volume does not expand much as the market moves lower. The bar at D is a Hidden Test (it dips under the low of the last bars in the reaction and closes above and near its high).

 

E - Just to make absolutely certain, the market makes a Test at E. Tests are always down bars (best when they close mid-range or better) and have low volume. Note the volume at E is less than average. E has dipped back into the high volume area at A & B and shows no supply left on the mark-down. The market immediately rallies vigorously.

 

As a general rule-of-thumb, tests are considered to have significantly low volume when the volume on the test bar is less than the previous two bars, as it is here at E.

 

F - Another Test occurs at F. This is classified as a Test in a Rising Market, but has the essential characterisitics of a Test: down bar, narrower spread (compared to the bars on the rally from E), and volume less than the previous two bars indicating no supply is coming in (as the market runs into the small congestion area to the left). In this Test, the close is a little above mid-range, as well. The next bar is up

 

Keep in mind that Springs, like Tests, should be considered only when there is strength in the background. Here, we had the strength of the Selling Climax. Another clue that this Spring would turn the market was the length of the rally between A & B. I often look for the longest and/or largest rally in the downtrend to indicate the end of the downtrend. Wyckoff noted this characteristic as a sign of strength in his tape reading course.

 

----

 

So, on one chart we have the stopping action of a Selling Climax, a Spring to clear stops and test for supply below the low of the SC, a test of the Spring because volume was a bit high (so there was some remaining supply found), a Test, and a Test in a Rising market.

 

 

Hope you find this useful.

 

Eiger

 

Thanks Eiger. I really respect your work and am greatfull for the time you take with your posts. I, like everyone else, am learning a great deal from you. In that spirit of educational growth, I must disagree on one of the bars.

 

The only test is see is F. Beautiful example of a test in a rising market. Narrow range closing down and in the middle of its range on volume less than the previous two bars. The next bar is up on higher volume but is pushing thru that small top on the left.

 

E: the problem here is the close. It closes on its low. Hence we have a narrow range bar that closes down from the previous bar on volume less than the previous two bars but closes on its low. This is no supply/no selling pressure. Of note this bar occurs within the area of the high volume climatic action bar (Long Shadow) and remains an ideal place for first entry.

 

Again, this is in no way a criticism.

[Eiger 10]

...

E: the problem here is the close. It closes on its low. Hence we have a narrow range bar that closes down from the previous bar on volume less than the previous two bars but closes on its low. This is no supply/no selling pressure. Of note this bar occurs within the area of the high volume climatic action bar (Long Shadow) and remains an ideal place for first entry.

 

Again, this is in no way a criticism.

 

Not taken as a criticism. You are probably right and you can distinguish between a No Supply and a Test, I just tend to lump them together. From my experience trading, the close really doesn't matter. Most important are the low volume and narrow spread. Both characteristics indicate a lack of activity, which is what we are looking for in a down bar. Also there must be strength in the background; otherwise, they are ignored.

 

Eiger

[Eiger 10]

I have been focusing more on the openning minutes lately for clues to how the day will unfold. Assessing the waves is always a helpful practice in this regard. Yesterday (Sept 9) was pretty telling.

 

The day before (Sept 8) began with selling, but by the close price had rallied back into the middle of its range on the day. At the end of the day, there was selling seen on high volume up bars closing in the middle (these are noted with an S on the attached 5-minute ES chart). Note the very narrow range and high volume on the last S. The market was being capped at this level.

 

The next day opens with the first two bars (marked with 1) down on heavy volume. The third bar off the open was also heavy volume and an up bar closing in the middle. All of these bars indicate supply. Note the red line shows a wave down larger and steeper than the reaction waves from yesterday afternoon's rally. This is a sign of weakness in it's own right and comes from Wyckoff.

 

In his Tape Reading Course, Wyckoff advised traders to carefully watch and compare the swings of the price movement. He said that when the down waves became longer in size or duration, or when the up waves shorten in length or duration, or both, the odds of a change in trend are good. I outlined the waves in yesterday's rally in purple. You can see the up waves had shortened and the first down wave of the day (red line) had become greater. Another helpful tell of supply was that the heavy volume on the last up wave of yesterday produced the smallest up wave in the rally. Very heavy effort with little result.

 

The increased length and accelerated stride of this down wave (in red) combined with the heavy volume to the downside on this wave, the high volume up bars from yesterday afternoon and the shortening up waves from yesterday, all indicated that the odds were good for further downside movement in price. Confirmation or lack of it would come on the next up wave.

 

The rally up was quick, but the volume fell off sharply on the rally. The spreads begin to narrow as we approach the old top from yesterday afternoon. At 2, volume increases, but the close is poor - this was also a very good clue of more supply. Were this market going to rally through and above yesterday afternoon's high, it would not have had such a poor close on such high volume. Bar 3 was a Top Reversal/2-bar Up Thrust and this began the decline.

 

Two No Demand bars at 4 & 5 indicated further downside to come.

 

A study of the waves and the effort (volume and spreads) on those waves at key areas of support and resistance can be a big help in trading. Add the VSA indications to highlight the strength/weakness and for triggers for entry/exit and the charts become clear.

 

-------

 

Another aid to assessing the waves is shown by the blue line graphic in the left side of the chart. This measures the length of progress of the waves. You can clearly see the shortened progress made by c compared to b and a. You can also see clearly that the red down wave took out all of the progress made by waves b and c, highlighing its significance as a SOW.

 

Hope you find this useful.

 

Eiger

[sw9 10]

Hi,

 

This is my first post, after reading many VSA posts.

 

Can someone tell me if todays [ 9-11 ] up bar is no demand on the ES daily chart?

 

The volume is low but the spread is high, is that ok?

 

Thanks, Steve

[Blu-Ray 10]

Hi,

 

This is my first post, after reading many VSA posts.

 

Can someone tell me if todays [ 9-11 ] up bar is no demand on the ES daily chart?

 

The volume is low but the spread is high, is that ok?

 

Thanks, Steve

 

Steve

 

I would say no because the reason the volume is low, is because it's the rollover period, so the volume has been spread between the September & December contracts.

 

Hope this helps

 

Blu-Ray

[Head2k 10]

Hi,

 

This is my first post, after reading many VSA posts.

 

Can someone tell me if todays [ 9-11 ] up bar is no demand on the ES daily chart?

 

The volume is low but the spread is high, is that ok?

 

Thanks, Steve

Even if it wasnt roll-over period I would say No. Volume represents active effort to move price. Spread and close of a bar represents the result of this effort. Now if you have low volume but the spread is wide and close is near the top of the bar, what does it tell you? To me it says that with little effort buyers were able to push prices far high. That means they met only little resistance on the way up. Does this sound like weakness? To me it doesnt.

 

If the spread was narrow and close lower it would mean that buyers showed little effort and there was little result. That could be a sign of weakness.

[Eiger 10]

Steve

 

I would say no because the reason the volume is low, is because it's the rollover period, so the volume has been spread between the September & December contracts.

 

Hope this helps

 

Blu-Ray

 

Or it could be that not many went long today because everyone is still bearish and short. Attached is the daily S&P Cash with the NYSE Total Volume. Although volume was less than the past few days, it is high relative to the last month and one-half.

 

Look closely at the volume, though. What is making all this volume this week? Perhaps its just everyone returning from summer vaction? Or, perhaps we are seeing informed interests stepping in and buying?

 

Tomorrow has a lot of news that could move the market. If news allows professionals to move it to the upside, there are a lot of shorts that will have to cover ...

 

Just a few thoughts that probably won't happen. But, on the other hand, it could turn out to be an interesting next couple of days. We shall see

 

Good trading everyone.

 

Eiger

[tawe trader 10]

Hi,

 

This is my first post, after reading many VSA posts.

 

Can someone tell me if todays [ 9-11 ] up bar is no demand on the ES daily chart?

 

The volume is low but the spread is high, is that ok?

 

Thanks, Steve

 

There is another mkt I check everyday (as well as SPX and ES) and it is the daily SPY. It is the ETF of S&P 500 I believe and I find it a bit more reliable than ES around the contract switchover period.

 

Yesterdays action looks fairly bullish to me, a big up day on healthy volume. It has also formed an outside day which maybe worth taking note of.

 

Regards

Tawe

[Eiger 10]

A trader asked me about an ultra high volume bar and the bar that followed on a stock/ETF chart. I thought this could be helpful to other traders and, thus, am posting it here. I see a fair number of posts about high volume bars that are confusing to traders trying to apply VSA prinicples. When they see high volume, they immediately want to make a countertrend trade (e.g., if high volume comes in on the downside, they want to take a long position and vice versa). Usually, traders get their hats handed to them for taking such trades. It doesn't take too many of these trades for traders to lose confidence in VSA. It is not the fault of VSA. The trader simply didn't take the time to look at the background ...

 

----

 

You asked about CMED and the bar on 8-13-08. It was a down bar, ultra high volume, and closing near its lows. I marked this bar and its volume on the daily chart with red arrows. The next bar was up. You asked if this is a strong bar.

 

In a word, the answer is No. This market is not showing strength here, but weakness. I’ll try to explain why from a VSA/Wyckoff perspective.

 

Let’s first take a look at the monthly chart. It is always a good idea when trading anything to look at a couple of time frames higher than the trading time frame. In my trading of the 5-minute ES, I look to the 30-minute and even the 60-minute charts first, to see what the larger background, trend, and S/R areas are. I want to be taking trades in line with the larger background, or, if I chose to go counter the background, I know I will not be able to hold the trade for very long. When trading off the daily chart, you can start with the monthly, then go to the weekly.

 

Monthly Chart

 

So, the monthly is interesting. From mid-2006 or so, it was in an uptrend. The high was reached in February 2008 at 1. Note the close is near the lows and below the prior month’s bar – bearish. If you look at all the other monthly bars in the uptrend you see this has the widest spread compared to any other bar. It is also the first bar since the rally beginning in 2007 to close poorly. Volume was high, but not ultra high. That bar told you that there is weakness in this stock.

 

The market reacts, then rallies on a very wide spread up bar on high volume at 2. The volume would lead us to question this bar (markets don’t like high volume on up bars), but the spread is wide and the close is good. Next bar is down on reduced volume – no significant selling pressure, so expect higher prices.

 

The market doesn’t go very far, however. At 3 we have a repeat of 1, but this time on more volume. Bar 3 is an UpThrust on ultra high volume. It is saying that the weakness or supply seen at 1 is now dominate. Selling is swamping demand. So, from the monthly chart, weakness is apparent.

 

Weekly Chart

 

On the Weekly, the picture becomes clearer. The areas of 1 and 3 from the monthly are carried over. On the weekly, bar 1 is the largest down bar with the greatest volume since the mid-2006 rally. This was a clear SOW where supply was swamping demand. On the rally from June 2008, note that the up bars labeled A are No Demand – volume is low as the market tries to rally. Compare these with the up bars in the rally from June 2007 – for the most part, up bars in this rally were on increased volume, on down bars, the volume dried right up. Not true on this rally. The down bars at B and 3 had increased volume, especially at 3. At 3 you have a 2-bar UpThrust/Top Reversal. This is decidedly bearish. Two bars later is a No Demand confirmation of the weakness.

 

So there is weakness starting at the high for this market at 1, and it carries over through the recent weeks at A, B, and 3. In VSA, we know weakness in the background doesn’t just go away. There is nothing bullish on this chart that I see. Further, the November 2005 high (marked C) had been penetrated (March – June 2008). This should have acted as support and the market rallied away from this area if it were bullish. Instead, we are now penetrating it again.

 

Finally on the weekly, we have a potential trading range forming between the points at 1 and 4. We are in the middle of the trading range and not the best place to take a trade. Odds favor at least a test of the lower end of the TR at 4 by this analysis.

 

Daily Chart

 

On the Daily chart, there is an Island Reversal at D – not VSA or Wyckoff, but this market gapped up on a narrow spread into the old top and supply area of 3, then gaps down the next day on an increase in volume and wide spread – very bearish. The heavy volume on 8-13 was not stopping volume – the bar closed on its low. You want to see the bar on ultra high volume like this close mid range or better to cbe considering stopping volume. The next bar was an up bar but still on very high volume. Markets do not like high volume on up bars – it was just mostly selling to anyone who would buy at that point. The market drifts lower.

 

Note the red dashed line. This is called an Axis Line. Markets tend to trade and rotate around these lines – you see them on all time frames and markets. This one is around the 41 level. It began with the demand at E, traded back down thru it, and then at F the market was held here to absorb supply for a brief time, and rallied above it. But it fell back through, and at G, was repelled once again until a month later it rallied back above it. It served as support again at H, and now we are at the 41 axis once again. It may give a small bounce here for a short period of time, but with all the weakness in the background, I would expect the axis line to eventually be broken and the market trade lower.

 

Well, this has been a study in multi-time frame chart reading and how to frame a current market. As you can see it is pretty logical. You can learn how to do this for yourself by a serious study of the Undeclared Secrets that Drive the Stock Market (T. Williams) and the Wyckoff Course, especially Wyckoff’s analysis of the late 1930-1931 market.

 

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Background is vitally important, no matter whether we are trading on a 5-minute chart or the daily. When you see high volume come in, don't automatically assume the trend is going to change. Look at the background. Assess the larger time frame trend. Check for nearby S/R levels. Assess the stride. Anaylze the spread and close. Wait for confirmation.

 

Hope you find this is helpful.

 

Eiger