[VSA] Volume Spread Analysis Part II

[CandleWhisperer 10]

High Volume Bars: stopping volume/climatic action

 

First, everyone should read the prior post by Eiger. He is spot on.

 

This post is about examining the transitioning of the supply/demand dynamics within the body of a WRB created on high volume. I wanted a way to "See" the dynamics change within the all important Supply/Demand Delta Zone. Moreover if the WRB Zone is in fact a place of change, I figured it could be seen by looking at what the Auction process is doing in this area or zone.

 

This is a VSA thread so let's keep the main focus there. Take a look at the 10 min candle chart. We see a WideSpread down candle on ultra high volume with the next bar up. Demand must of entered on this candle, otherwise the next bar would not be up. As it happens this candle is also a WRB. The body of this WRB may become a transition area. Once we see the next candle, we know we have a valid WRB supply/demand delta zone. Three candles later, we get a narrow down candle with volume less than the previous two candles. This is no supply. The very next bar is a Shake Out. This is a very strong bar. Even though it is an up bar on very high volume. Why, well for one thing we have strength in the background .

 

The telling thing for me happens on the one minute chart. IMHO, one can see the auction market process taking place as the market transitions from one dominated by sellers (supply) to one dominated by buyers (demand). The first Balance Zone is created by sellers as the high is made before the low. However, there are reasons to believe a reversal is more likely than continuation. I do not want to get into that as this is a VSA thread. But what is interesting is the next Balance Zone is made by buyers as the low is made before the high. Move to the head of the class if you see that this Balance Zone is part of the Shake Out candle on the 10 min.

 

Normally we expect that once a Balance Zone is created that price will trade down to at least the midpoint of the zone and usually test the opposite high/low of the zone. Note that with the buying Balance Zone price doesn't make to the midpoint (red dashed line). Also note the blue selling paint bar that has no follow thru. That is price is rejected at that level and we now can definitively conclude that the bulls are in charge and there has been a shift in the supply/demand dynamic. Interestingly, this entire process takes place within the body of a WRB. Although the bar that completes the first Balance Zone is a bit lower (this would be the wick of that WRB candle).

 

Also check out that we get a NoSupply bar that is supported by the high of the WRB zone and immediately following a blue buying paint bar. Note how that bar closes near its high, has an open near its low, and has a midpoint greater than or equal to the high of the previous bar. It's a climber.

 

In sum, once we see the valid WRB we can start looking for certain VSA signals within the body of that WRB. More broadly, we see that strength does indeed come in on down bars. Especially on down bars with very high to ultra high volume.

Edited September 12, 2008 by CandleWhisperer

[Eiger 10]

High Volume Bars: stopping volume/climatic action...

... once we see the valid WRB we can start looking for certain VSA signals within the body of that WRB ....

 

Great post CW. Can you explain the significance of the body of the wide-range candle and what makes it such a potetnially important location? VSA talks about coming back into the area of high activity (the wide range bar in general) and testing the high volume, but it doesn't say much more about it. Is there anything that can be added from candelstick theory?

 

Thanks.

 

Eiger

[CandleWhisperer 10]

Great post CW. Can you explain the significance of the body of the wide-range candle and what makes it such a potetnially important location? VSA talks about coming back into the area of high activity (the wide range bar in general) and testing the high volume, but it doesn't say much more about it. Is there anything that can be added from candelstick theory?

 

Thanks.

 

Eiger

 

 

Eiger;

 

Just a few things:

 

1. The Body is defined as the area from the open to the close. Thus there are WRBs on bar charts. Simply, the concept is not exclusive to candle charts.

 

2. Tom Williams does not look at the open. Yet if one includes the open one can narrow down the Supply/Demand Delta Zone from the range of a widespread bar to the WRB (open to close range). Tom doesn't like the open because he says it can be highly manipulated. However, it is still the first balance point. That is the level where there is agreement on price but disagreement on value. More exactly, it is the first such point since the last close (which is of course the final balance point for any period). And we are not interested in the open versus the previous close, but the open versus the close on the same period. Thus, even if the open was manipulated higher from the previous period, it is where that open is in relation to the close.

 

3. Mark is the true WRB expert and I can not say too much about them in terms of what makes one more significant than another. However, we know that VSA is looking for high volume bars and we know the role VSA says news events play in BB manipulation. While Mark has mentioned this both here and at Elitetrader.com, I will not use the three letter term. But I did say in the previous post we need to wait for the period after the WRB to know if it is a significant WRB......

[Eiger 10]

I think it is worthwhile to note how the market is unfolding with all this bearish news about Lehman, AIG, & Merrill. I especially like the Bank of America's CEO's statement yesterday:

 

Bank of America Corp. (BAC) Chief Executive and veteran deal maker Ken Lewis said Monday that

the world's financial system is "under almost unprecedented stress"

 

So, if this is true, how come the financial sector is holding better than the overall market?

 

The attached chart shows data through yesterday, September 15th for the weekly SPY (top) and XLF (bottom), the SPYDR Financial Select tracking ETF. XLF has led the market down for nearly a year.

 

Look at the huge volume in XLF over the 2nd and 3rd weeks in July and how the market responded. It is the largest vcolume on the chart, a clear Bottom Reversal, and a potential Selling Climax. Thus far (the week isn't over yet), XLF is holding above the July lows while SPY dropped under. Today there was a good rally in the Financials as well as the S&Ps (See attached daily chart). Note that today's volume on the XLF chart is way off. It actually was a little more than yesterday's volume, not abnormal volume as shown on this chart (there is some problem in the charting).

 

Although it is still early (we need confirmation), a potential Spring may be forming on the daily in the S&Ps.

 

Eiger

[CandleWhisperer 10]

Eiger,

 

Two questions:

 

1. Does the fact that the last bar makes a lower low and not a higher high casuse you any concern?

 

2. That's alot of volume there for an up bar. When you say off, you mean the data? Suppose the volume is correct, is that still a potential spring? With so much volume we really need to see what happens on the next bar.

[CandleWhisperer 10]

This chart is a bit busy, but I hope you take the time to see what is being put forth.

 

First, I really don't like profit targets. I would rather let the market take me out. For those who do, Supply/Demand Delta Zones created by WRBs not only make ideal trade entry points, but also possible price/profit targets.

 

Let's start at the beginning.

 

A: We see a large white WRB with volume that is high. What cannot be seen is the tops to the left. In other words, while markets don't like wide spread up candles on high volume, this is pushing thru supply and thus bullish. We now have our first WRB Zone (Zone 1). Our first intent is to take a trade if price falls within this area. There is a No Supply and some would enter long here. However, this candle is not fully within the zone, so we do not.

 

B: Another wide spread up candle, this time on even heavier volume. Note that the close is off the high. Some supply (selling) entered on this bar. Why else would the volume be so high and the close off the top of the range? WRB Zone 2 is also created. The next candle is up but the range narrows and volume falls slightly.

 

C: Now we see an even narrower candle on increased volume. The Narrow range is a clue that something is changing. With all that volume, why is the range relatively small? VSA says the range is being kept small because those that can see both sides of the market, see all the sell orders form the BBs and thus expect prices to fall. If they were bullish, they would want to charge higher and higher prices to enter as they would be expecting price rises.

 

D: Wide spread down candle on good volume. We make a higher high, but close down from previous bar. Also note that this candle engulfs previous narrow candle. A shift is underway. This gives us Supply/Demand Delta Zone 3 on the chart.

 

E: Before talking about E, take a quick look at the No Supply. Notice that this is not within the body of a WRB and thus not a signal. It is true that price moves up from this point, however. Also the first No Demand is an Up thrust in the form of No Demand.

 

E is No Demand within the body of the Dark WRB. We have weakness in the background so this looks like a good place to go short. At this point, we can expect that price may fall down into the area of the first WRB or Zone 1.

 

F: Another No Demand sign within the body of a WRB. At this time, we also have just had a No Demand within the range of a Long Shadow on the 30 min. Just more evidence that the market is weak. This is another entry point/ add-on if already in.

 

From here price does indeed move down to the profit target area. So we can see that the Supply/Demand Delta Zone can play more than one role- 1. an area to look for signs of strength and weakness and 2. profit target areas.

 

On the other hand, notice that one could simply move a trailing stop down on the appearance of each successive No Demand candles.

[Eiger 10]

Eiger,

 

Two questions:

 

1. Does the fact that the last bar makes a lower low and not a higher high casuse you any concern?.

 

It makes a lower low on the weekly chart, but the week isn't over yet, so that bar is incomplete. THe daily shows a bullish bar on the potential spring.

 

2. That's alot of volume there for an up bar. When you say off, you mean the data? Suppose the volume is correct, is that still a potential spring? With so much volume we really need to see what happens on the next bar.

 

Yes, the volume data is off and, therefore, incorrect. For some reason, MetaStock/eSignal give incorrect data right after the close on daily bars. Had that been true volume, the setup would be suspect as markets do not like high volume on up bars since there would be much selling in that volume, potentially swamping demand.

 

Unless volume is well below average on a Spring, it is best to be patient and wait for a Test of the Spring. This is why in my judgement it remains a potential Spring. It is not yet confirmed.

 

To help Wyckoff students better understand the spring concept, Bob Evans catagorized three levels of Spring: A No. 1 Spring approaches the support level on increasing volume, has a lot of volume on the Spring bar, penetrates well below support, and has a poor close. These Springs are most likely to fail and begin another leg down. A No. 2 Spring has some volume, modest penetration, and closes well. The No. 2 Spring remains a potential Spring until it has been subsequently tested. A No. 3 Spring has only a small penetration of support, draws only light volume from the market (no supply), and closes well. This does not need a test.

 

A useful way to think about Springs (or any market movement) is to assess the market's repsonse, which Evans's spring guidelines help us to do. In one part of his Studies in Tape Reading, Wyckoff was discussing the tape details of a day in US Steel and how the stock was responding to the buying and selling pressures read in the tape. He wrote: "This study of responses is one of the most valuable in the Tape Reader's education. It is an almost unerring guide to the technical position of the market."

 

Eiger

[lordbinder 11]

candle wisperer, maybe is a dumb question but how you set the 3 zones particuarly the third one

[zdo 20]

lordbinder,

 

In case candlewhisperer never answers, it looks like (uncontained to the left and containing to the right) large volume large candle bodies form his zones... first big dark body forms the 3rd. ... hopefully he will explain it more accurately and in more detail...

 

zdo

Edited September 17, 2008 by zdo

[lordbinder 11]

thoguth the same but the third is on other set of rules unless its a projection of another one

[CandleWhisperer 10]

candle wisperer, maybe is a dumb question but how you set the 3 zones particuarly the third one

 

The zones, which are simply called zones 1, 2, or 3 on the chart are in fact Supply/Demand Delta Zones created by WRBs.

 

As to what WRBs to use, I have mentioned some of the things I look for:

 

1. As a VSAer, High Volume of course.

 

2. Relatively Large WRBs (if the most recent WRB is larger than any other WRB on your chart, it may be significant).

 

3. WRBs related to news events. VSA teaches us that the BBs use news events to manipulate the market and establish their positions.

 

4. Gap Sandwiches (see WRB thread)

 

5. Volatility

 

There is something else going on with respect to what makes a WRB significant and thus creates the type of support/resistance zone I am interested in.

 

From a VSA perspective, numbers 1,2,and 3 are what you should be focusing on.

[Eiger 10]

Today was a really good day that proves the principle of always being patient and waiting for confirmation: On a potential Spring, we look for a confirmation in the form of a Test before entering the market long.

 

Eiger

[CandleWhisperer 10]

I was going to do a detailed analysis of this chart, but in truth everything is on the chart itself.

 

Actually, I will add a couple things. The trade here is a short from the No Demand. This is ideal trade based on the weakness in the background. This weakness comes in the form of the Squat bar (which is also within the body of a WRB) and the high volume down candle (the WRB). Prior to that down candle we see an end of a rising market.

[mike_ITL 10]

Hi,

 

just wanted to inform you that I'm selling my copy of the TradeGuider Professional Chart Reading Boot Camp (2 CD).

 

Please PM me if interested.

 

Thank you.

 

Mike

[CandleWhisperer 10]

Calling all Index futures traders:

 

I would to see some charts and analysis of this past week and where we may go from here.

 

On a grander scale, How is our thesis affected with the banning of short sellls?

[CandleWhisperer 10]

Shameless attempt to get a screen shot on the Home page. LOL.

[kuky969 10]

CAndle

could you give please some resources to study about "volatility expansion " and "contraction" I didnt find any mention about it in book Master the markets. Thank you

[mister ed 10]

CAndle

could you give please some resources to study about "volatility expansion " and "contraction" I didnt find any mention about it in book Master the markets. Thank you

 

Hi kuky - I think you are asking in the context of CandleWhisperer's postings and charts, right? You should find some information on these concepts on the threads dealing with Wide Range Bars and Wide Range Body candles.

 

Try this one: http://www.traderslaboratory.com/forums/f151/wide-range-bodies-or-big-candles-1480.html

[CandleWhisperer 10]

CAndle

could you give please some resources to study about "volatility expansion " and "contraction" I didnt find any mention about it in book Master the markets. Thank you

 

Hi Kuky969;

 

Volatility expansion and contraction are not in the Master the Markets book. These concepts are directly related to WRB analysis. Whilst it is true that there is a relationship between volatility and volume, VSA doesn't delve into volatility.

 

One thing to remember is that not all WRBs are created equal. As I have said, those with high volume are more significant than those with little volume. WRBs created as the result of news releases are more significant than a "random" WRB. VSA tells us that news release are used by the BBs to manipulate the herd, and that the BBs need high volume to mask their trades and not bid up/down the price against themselves.

 

VSA also teaches us that the BBs try to hide from amongst themselves and the public that can read a chart. One way they hide is to attempt to keep volume low. Which is not an easy task because of the size they trade. Never the less, understanding WRB analysis and thus volatility analysis helps in such areas. Note how the amount of volume is relatively low during both the expansion and during the contraction phases that lead to the WRB which creates the Supply/Demand Delta Zone.

 

Bringing it back to the Book, "So by simple observation of the spread of the bar, we can read the sentiment of the market-makers; the opinion of those that can see both sides of the market", pg. 28. So even a wide spread bar on low volume tells us something. And WRBs are just a specific type of wide spread bar in many ways.

[kuky969 10]

Hi Mister Candle -- Thank you for answers

I think that important is where WRB occured. If on strong level of resisten. and on big volume is bigger probability of trend reverse or sideway move. WRB that occured as break up from congestion ,close is on top of bar and relatively low volume so is bigger probability continue of move . WRB on ultra high volume occured anywhere is climax and create a RS level. Just my (maybe wrong) opinion.

Thank

[CandleWhisperer 10]

This chart is for Browns Fan. Rather than muddle up his new thread I have put it here. VSA is all about volume and news events. Both of which exist in forex.

 

Interesting action in the Euro. Notice the Ultra High Volume candle closing off its lows with the next bar up. If that candle had been selling, then it should have closed on its low. It did not. Strength enters on down bars. This was a down bar.

 

Price shoots up as the vote seems to suggest that the bill will not pass. This is a high volume up candle, but the volume is less than the previous candle. However, if one looks at the range and the volume and compares it to the last x amount of candles, it is high. The highest in fact. So there is a bit of "Climatic Action going on in this bar". Also note that this candle is a WRB.

 

Next candle is the kicker. The market catapults up on the realization that the bill has flamed out. BUT look at where the candle closes. Off of its highs and in fact below its midpoint. Supply must have entered this bar. Why else would the close be less than the midpoint? The BBs that were buying on the first candle are doing some selling here.

 

While volume is high, it is not higher than the first candle we looked at. With said volume and an extreme range, we have an interesting thing happening. The range is larger than one would expect with the amount of associated volume. This is Low Volume Churn. Put another way, the range is not indicative of buying pressure, but rather the opposite.

 

A great place to take a trade would be within the shadow of this Long Shadow. After the down candle, price does move up. Yet price moves up on less volume (no demand). We do see at the top an up bar on volume less than the previous two candles, closing off its high. This is VSA's low volume sign within the range of a high volume bar.

 

From a news trading point of view, we don't want to trade the reaction (news) we want to trade the reaction to the reaction.

[CandleWhisperer 10]

Been watching some of the Trade Guider videos. Here is a great example of one of TG's favorite set-up. This particular set-up was discussed in great detail at the London workshop I believe. I also believe our man Seb Man really likes it.

 

First, I would point out the non VSA part: Simply this fact that this pattern takes place within the body of a WRB (as I would argue every good set up does or should).

 

The Background:

 

We see a wide spread up candle on good volume with the next bar down. While markets do not like wide spread candles on high volume, because there could be hidden selling, the volume here is not that high. However, we note that the range and the volume together are more than we have seen in some time. This is climatic action.

 

The next candle has a smaller range and higher volume. A squat. It makes a higher high, and closes lower just off its lows. This is a selling squat. The range is kept narrow as the BBs expect lower prices to come. Next candle closes below its midpoint and makes a higher high. Supply enters on that high and pushes price down to where it closes. Volume is lower than the squat and about equal to that of the Wide Spread candle. One can call this an Up Thrust.

 

The next bar is a narrow bar with a lesser range. If you thought it was no supply, you would know you were wrong on the next candle which is a dark WRB that closes lower. Instead, one should of noted that this bar actually has a great deal of volume for the size of its range. Volume is churning in that small range. This is another form of a squat.

 

So we have weakness in the background.

 

The Pattern:

 

This is the "Top/Bottom Reversal Pattern". Ideally, the first candle (bar) will close on its high. The next candle ideally would make a lower low and close on its low. This candle would also not make a higher high. This "top" is also called an Up Thrust over two bars. Of course, the opposite is true for the Bottom Reversal. First bar down and closing on its lows. Next bar up, making a higher high, and closing on its high. Those would be the "text book" examples. Here you can see that the candles do not close on the highs and lows, but just a bit off. Close enough for Government work. LoL.

[CandleWhisperer 10]

This is in response to a PM I got. I am posting the answer here as I hope it will spark life into a dying thread.

 

Yes, it is true that many posts here deal with looking for entry points.

 

VSA does not directly speak to trade management plans. That is , how to get in and then exit. Which would also include where to place stops and or trail them. Tom does talk about what he does. As I understand it, he "allows" for 1 up bar in a down trend and 1 down bar in an up trend. Hence, if there are 2 consecutive up bars, he would be getting out on the close of the second up bar. The chart below shows such an exit. Assume we enter short where the arrow is.

 

I do not really like this method. One thing I do not like about it is that you must be able to re-enter and re-enter and re-enter. In other words, you run the risk of over trading (not to mention the commissions involved ).

 

I prefer the use of WRBs. On the chart you see numbers. Here is how it works. Once there is a WRB, you place a stop at the top of the body (plus 1 or 2 tics/pips/handles) but ONLY AFTER there is another WRB. So, the WRB with the 1 is where the stop is placed but only after the appearance of the WRB with the 1/2. When there is another WRB, we can move the stop down to the second WRB.

 

Granted this method works well in highly trending markets, but that is the point. The trend is my friend. When the market is moving directionally, all I want to do is be with it. PP talked about surrendering to the market. I like that idea.

 

Here, one could of also simply trailed a stop using the No Demands also.

 

I have shown a few post with profit targets using WRBs, but that was for the benefit of other members as I do not use targets. Plus it further shows the power of WRBs in general.

 

Hopefully, other members will add their methods of exiting a trade.

 

P.S.

 

If you look at the first example of where Tom would be getting out, you have a No Demand sign within the body of a WRB. That is to say, an ENTRY signal.

[Eiger 10]

...

This is the "Top/Bottom Reversal Pattern". Ideally, the first candle (bar) will close on its high. The next candle ideally would make a lower low and close on its low. This candle would also not make a higher high. This "top" is also called an Up Thrust over two bars. Of course, the opposite is true for the Bottom Reversal. First bar down and closing on its lows. Next bar up, making a higher high, and closing on its high. Those would be the "text book" examples. Here you can see that the candles do not close on the highs and lows, but just a bit off. Close enough for Government work. LoL.

 

And, you have a nice No Demand bar that followed the TR, giving you confirmation and a well-defined entry point.

[CandleWhisperer 10]

And, you have a nice No Demand bar that followed the TR, giving you confirmation and a well-defined entry point.

 

 

Well, it took longer than I had hoped and did not come from anybody new, but that's correct.

 

Nice pick up Eiger.