VOLUME SPREAD ANALYSIS
Friends
For me TA is a passion. I have been experimenting a lot on various aspects of TA. It has
been a good learning experience. Sharing my experiments was a bigger learning
experience. Truly, unlike sharing money sharing knowledge only leads to further
expansion of knowledge.
A few months ago I came across a thread on “Volume spread Analysis” in the Traders
laboratory forum. Tough I did not understand much the seeds of interest were sown. Thus
began a new chapter in my TA journey.
I had posted some charts based on my work on this. A few had shown interest on this
especially our esteemed Asish. So we will begin a discussion on the “Volume Spread
Analysis”. I request other knowledgeable members to add their bit to this discussion so
that we have fruitful learning experience.
Calling VSA as advanced strategy may be controversial. But the concept is rather new
and is gaining wide popularity. Hence we will consider it as advanced strategy.
Regards
karthik
Note: As we know this will be a restricted thread. Those who cannot post their doubts can
still posts queries in my other threads and genuine queries would be answered there.
Good post even will be copied on the main thread. Now that the awareness on the
reputation points has grown, we hope more members will be able to post in this thread.
Some background notes……..
Once the seed of interest were sown hours were spent searching the net and watching
clips on Youtube. The journey was full of obstacles. There was hardly any clear cut
information available. Most were sales talks with sketchy information. Then hours were
spent studying the charts and formulating rules. The rules were coded to check the
validity of these rules. Some Traderji friend stepped in and there were some real time
checks for these rules. Thus we came up with our own interpretation of the “Volume
spread analysis”.
Please do not start comparing my description with the ones that may be available from
the net. I have used some basic stuff from Tom Williams’s book and have built on it.
Here we are not trying to clone the Trader Guider system.
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
The foundat ions for volum e spread analysis were laid by R.Wyckoff way back in t he
early 1930s. Wyckoff was supposed t o have m ade fort unes wit h his principles.
Wyckoff st ared wit h a prem ise t hat price / volum e / Tim e could provide a pict ure of
t he dem and and supply from sm art m oney ( he called t he sm art m oney ‘com posit e
m an’) . We will com e back Wyckoff lat er in t he t hread. I t would be nice t o look at
Wyckoff m et hods t im e t o t im e as his work is t he basic one and ot hers have built on
it .
Wyckoff had t hree basic principles or..say.. laws
Pr ice a nd volu m e
Ca u se a n d Effe ct
Effor t a nd Re su lt
The current day VSA available in t he m arket st ill relat e t o t hese t enet s.
Much lat er in t he 70s Tom William s who worked wit h a syndicat e ( read… Sm art
m oney) for 15 years, developed on t he Wyckoff’s work and cam e up wit h Volum e
Spread Analysis and lat er com m ercialized it . ( The crit ic would say ..why
) . Now m any m ore
com m ercialize it , he could have m ade m oney him self..
com panies offer t heir own concoct ion of VSA, hawkeye t raders and genie soft ware t o
nam e a few.
Tom William ’s VSA basically ignores t he open of a bar and uses high, Low and Close.
This is where it basically differs from classical candlest ick analysis. Most com m ercial
vendors claim t o use m ore t han 300 indicat ors t o analyze each bar. I have seen t hat
som e of t he VSA vendors use ot her indicat ors t hough not explicit ly.
One t hing is cert ain t hat t he availabilit y of basic inform at ion on VSA is scarce. I have
com e across m uch discussion on ot her forum s on VSA. However m ost revolve around
com m ercially available packages. Our int ent ion in t his t hread will be t o explore t he
basics so t hat each one of us can arrive at our own convenient VSA analysis.
Now it is time to move on ….
I know most of you are eager to get straight into the core of VSA. But let us lay some
foundations before building the blocks of VSA. First thing is of course to understand a
little more about working of Smart Money (hereafter we will just use the term SM to
indicate Smart money).
The SM basically moves the market in four phases as follows
1.
2.
3.
4.
Accumulation
Markup
Distribution
Mark Down
Most of you may be fully aware of these. Still we will look at these phases more in
details as this would help us to understand the SM operation better which in turn would
give a better perspective to VSA.
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
There will not be any demand for something when there is plenty of it available and
nobody wants it. As the availability decreases and more people want it then the demand
increases. So the first thing the SM does is find something that is available a plenty and
cheap. The next step is to create a scarcity of the same and get people interested in it
which in turn generates the demand. This is first phase which is Accumulation.
Accumulation
Accumulation is a process through which the SM acquires a large quantity of the stock at
the lowest possible price. Accumulation is a subtle, sophisticated and sly process of
cornering a huge quantity of the stock that makes the following phases possible and
worthwhile. Once a large quantity has been absorbed the number of floating stock
reduces and the demand increases. This makes possible the next phase Markup.
Accumulation normally takes place in congestion areas. Congestion area are mostly
sideways range bound movements where the stock appears to have no interest to either
move up or move down. The SM ensures that the stock is contained below a certain
upper level which is the supply area. At the same time the SM also supports the prices
above a certain lower line which is the support area. The stock moves within an upper
resistance or supply area and a lower support area.
The congestion areas are characterized by Indecision. One of the most important
characters of congestion areas is the Low Volume. When most traders are bullish or
bearish the volume is high. Low volumes indicate indecision among the traders on
bullishness and bearishness.
Ah.. Sounds easy…….. Well the problem is that congestion areas are seen in both
accumulation areas as well as Distribution areas ……… oh , Well that is not the only
problem………. There will be periods where no one seems to be interested in the stock…
the pattern of price movement most of time very similar to the congestion pattern…..
So the naturally the question is how one would ascertain if the pattern is really
accumulation in progress……. A little later on this and other congestion patterns…..
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
So t he quest ion was …How one checks if t he congest ion area is really an
accum ulat ion area.
There are a few t hings t o lookout for..
•
First , t he indecision should be quit e visible. I n ot her words t he volum e should
be low and quit e. No huge volum e upsurges. Even if t he volum e is relat ively
higher t he range bet ween up day volum es and down day volum e should be
narrow.
• Second, t he spread of t he bars ( High – Low) should be narrow.
•
Third, t he volum e should shrink near t he support line and expand near t he
resist ance line.
•
Fourt h, t he st ock should be t rading in a range for som e weeks if not m ont hs.
Also you m ay see som e shakeout s in t he t rading range. The SM would t em porarily
drive down t he prices below t he support line in order t o t akeout t he st op losses and
panic t he weak hands int o selling. You will see t he st ock bounces back above t he
support line im m ediat ely. By t his process t he SM is shaking out t he weak m oney
from t he st ock. For m ost of us it is j ust a failed breakout . Som et im e t he st ock
inst ead of bouncing back would cont inue t o drop if t here was t oo m uch supply. So
t rading t hese breakout s could be t ricky.
Also it would a good sign if t he st ocks t rading range is m uch above t he support line.
Norm ally we would see som e of t he above signs if not all in t he accum ulat ion area.
There are m any ot her pat t erns which signify accum ulat ion. Som e of t hem are
rounding bot t om s, reverse head and shoulder and double bot t om s ( or “ W” ) pat t erns.
Each could be explained in t erm s of SM act ivit y. However we would go int o t he
det ails now. One t hing t o keep in m ind when evaluat ing pat t erns is t hat it is very
im port ant t o check t he volum e pat t ern as well.
For an exam ple we will look at t he chart of HCC where a clear accum ulat ion
indicat ion was seen June 2007
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
A few point s about t he congest ion zone we are looking at for signs of accum ulat ion.
I t is im port ant t o look at t he hist ory of t he st ock prior t o t he congest ion area.
A few t hings t o look out for….
Has t he st ock gone t hrough a cycle of accum ulat ion, m arkup, dist ribut ion and
arkdown previously? Were t here signs of a selling clim ax j ust prior t o t he congest ion?
I f so, t he SM are really looking out for m aking anot her round.
Or t he st ock has been languishing aim lessly prior t o t he congest ion zone you are
looking at . I f so, t his area you are looking at is not accum ulat ion at all.
Was t he st ock enj oying an upt rend prior t o t he congest ion? I f so, t his could be a reaccum ulat ion going on here.
Was t he st ock undergoing a m inor down t rend ( aft er an up m ove) prior t o t he
congest ion? Was t here a downt rend wit hout selling clim ax? Then t his could m ean
t here is re- dist ribut ion in progress and it m ay be advisable t o look out for sign of
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
dist ribut ion.
( I f you are wondering what is selling clim ax.. don’t worry.. we will t ake it up in det ail
lat er.)
Now we come to the next phase in the game plan of SM, namely “Mark Up”.
Once the smart money has a cornered a huge chunk of the stocks they are ready for the
next move. The idea is to jack up the prices so the SM can fill their pockets. Typically
you will see the low are getting higher. The closes are slowly getting nearer to the high.
The prices are getting higher on lower volumes as there is very less supply. The reactions
happen much higher than the support line.
Then ..the stock shoots through the resistance or supply line with higher volume. For that
matter the stock need not exhibit the characteristics mentioned above. Suddenly it can
just pop out of the congestion zone.
It is better to take note on the volume at this juncture. The volume need not be very high
at all. Since there is no supply (SM have the majority of the floating stock). If the volume
is moderate we should see it coming in strongly soon. Otherwise the move will collapse
and stock would return to the base. We should see a large swift increase in the volume in
case of a genuine breakout. The stock should be closing near the top. Also too much
volume is not good. It would mean too much supply is coming in. Heavy volume with the
stock closing in lower half would definitely mean supply coming in. Typically an 150%
increase in volume with the close near the top would indicate a successful breakout.
The breakout is just the beginning. Then the stock moves up in stages. Each stage would
be an advance at higher volumes and a retracement at lower volumes. The retracement is
mainly due to short term traders booking their profits. The SM also starts the distribution
during the retracement. The point at which the retracement stops become important.
These should be above the previous retracement stops. In simple terms as Saint would put
it the stock is making higher high pivots and higher low points.
We will also see sideways movement during the up move which would be congestion
areas. We need to pay lot of attention to these congestion areas for this could be final
distribution areas before the mark down begins. Also it pays to give attention to volume
during retracement and congestion areas. Increasing volumes near support line and low
pivots indicate problem. If the increase is dramatic then it is time to re-evaluate your
position.
Finally the stock could make a climax run where the price and volume explode. The
shorts run for cover and the green horns rush in not to be left out... like cattle rushing into
a abattoir. Soon rapid markdown starts leaving the weak money holding the bag and he
SM their cash.
Please do note that here we are talking about more of an idealistic picture. In reality it
could be more complex and many a time difficult to decipher. But then practice man one
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
perfect.
Just enclosing a chart with similar conditions mentioned above.
Now let us come to the third phase in the SM game plan which is “Distribution”.
Distribution is the process where the SM is offloading their accumulated stock at a much
higher price.
It is not very easy to spot distribution. Many a times you will not see any congestion
areas. The UP move may slowly deteriorate and start rapidly deciding after a furl of
heightened activity. The Wyckoff puritans may disagree here.
In mark up phase after the stock has run up for some time you will the volume
diminishing and the spreads narrowing. The angle of ascent becomes lesser and lesser.
The stock trend may even flatten. This would mean that the demand is drying up. The
buyers are not willing to pay a higher price for the stock. Also sellers are reluctant to
offload their positions hoping and waiting for a better price. It is here the SM slowly start
offloading their stock. Much care is taken not to make it visible. Volume is never too
high. Prices are support at certain levels so that there is no panic. Here it is important to
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
take note of the volume price pattern and angle of ascent. Too steep an ascent is also a
problem. Suddenly you will see the stock dropping down like stone from its high perch.
It is at the top you will see patterns like H&S and double Tops which are distribution
patterns.
Many times it is hard to maintain any semblance of the uptrend continuing and so a
sideways congestion move ensues. The congestion zone will be quite similar to the zone
we discussed earlier for accumulation. You will see the price being supported at some
support level and being contained within a resistance level. The points to take note are the
same ones we talked about in the accumulation zone. Just like in the shake outs in the
accumulation zone you will see a shakeout in terms of up thrust bars. One has to be very
careful trading the breakout from the distribution zone. If it turns out to be the final
climax move you will be left holding the bag. But then the stock may goes for another up
move. Here looking for uptrusts and other weak indication becomes necessary. We will
be talking about these indications later.
In the final climax run the stock explodes in terms of volume and price. Like I said before
the breakout traders , greenhorns rush in and the shorts will run for cover. Then you will
see many Uptrust Bars where distribution takes place with maximum prices. There could
be a series of Uptrusts and then…….BANG….. the stock drops down like a stone.
We now com e t o final st ep in t he SM gam e plan, t he “ Mark Down” . When t he SM has
disposed off m ost of t he accum ulat ed st ock t hey st art t he m ost dram at ic m ove of
crashing down t he prices. Suddenly supply com es in plent y overwhelm ing t he
dem and. The price st art s t um bling. The spreads dram at ically widen. There is panic
selling from invest ors. But t he prices drop so rapidly and m ost of t he invest ors and
green horns t hat ent ered lat e never get a chance t o off load t here holdings.
Like t he m arkup phase we will see som e rallies in t he downt rend. These are m ore off
react ions. Eit her t he SM t hem selves t ry t o shore up t he price for t heir last bit of
holding. Day t raders, “ Value I nvest ors” t rying t o bot t om pick and t he green horns
t rying t o “ Average” cont ribut e t o t hese rallies. Our friend Saint s calls averaging
“ Cat ching a dropping knife” . I cannot find a bet t er descript ion for “ Averaging” . I t is
bet t er t o not e t he volum e during t he rallies. You will find t he volum e is m ore on
down days and less on up days. When t he rally fails t he average invest or panic and
st art selling and t hat accelerat es t he fall.
I t m ay t ake weeks for
indicat ed by a st opping
t he st ocks t o st art t he
spread and closing near
t he down t rend t o reach t he bot t om . The end is generally
volum e or an absorpt ion volum e. The SM m ay be absorbing
gam e again. You would find a High volum e bar wit h long
t he t op.
I t is during t he m ark down phase you will see rallies like t he “ Dead Cat Bounce” . Pay
at t ent ion t o t he volum e pat t ern during t hese rallies.
The m ark down phase is t he m ost depressing and cruel part of t he SM gam e plan. By
t he end of it t he SM would be t aking delivery of his brand new E class Benz while t he
average invest or is scout ing for a buyer for his run down m arut i.
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
Of course t he Markdown phase does offer good opport unit ies t o sm art invest ors who
are adept in short side t rades.
But t he m ark down phase has a silver lining… t owards t he end it offers t he sm art
invest ors m any opport unit y t o ent er int o som e really profit able t rades. We will
discuss all t hese lat er.
Now that we have a general idea about the SM operation we can step into the world of
VSA.
VSA involves analyzing each bar with respect volume, spread and close. We will ignore
the open. Also while analyzing the bar action we will also keep in mind the general
background of the market.
As a first step let us make some definitions. These are elementary and most of you
understand this. But for the sake of synchronizing our thought I will repeat these here.
Some Basic Bar definitions.
Upbar - A bar would be called a up bar if the close of the bar is above the close of the
previous bar.
Downbar – A bar would be called a Downbar if the close of the bar is below the close of
previous bar.
Spread – Spread is the difference between High and Low.
A wide spread Bar – If the spread of the bar is above 1.8 times the average spread then
we will term it as a wide spread bar. The factor of 1.8 is a tentative one.
A narrow spread bar – if the spread of the bar is 0.8 times the average spread then we will
term in a narrow bar. The factor 0.8 is again tentative.
Note:
The problem of calculating the average spread is that during volatile period the average
spread is high and in non volatile period the average spread is lower. So a bar which
could be termed as a wide spread bar (WRB) in non volatile times could become a
average or even a Narrow spread bar (NRB) in volatile times. For simplicity sake and to
take the discussion forward we will keep the above factors common. At a later stage we
can discuss about methods to arrive at better methods of defining the average which
works at all times.
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
Now let us define some Close positions.
Up close : A close near the High would be termed as a Up close. (Upper 30% of the Bar)
Down close: A close near the Low would be termed as Down close (Lower 30% of the
Bar )
Middle close: A close in the middle would be termed Mid close (between 30% to 70%)
Please note that the values mentioned above could controversial. But for this discussion
we will take these values and move forward.
Now we have some basic tools to analyze the bars. Next we will look at volume.
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
Finally…. we will step in the actual VSA. VSA measures the weakness and strength of
individual bars. In addition it looks at the background strength/Weakness. So we have to
always look out for Weakness in a uptrend and for strength in a down Trend.
Each bar could be characterized to indicate Strength or Weakness based on the Spread
and volume.
We will start with looking out for weakness. First we will look into one of the most easily
identifiable and strong indication of weakness which is commonly called the
UPTHRUST Bar. And what a day to talk about Upthrust… The charts are full of them
today…Even the nifty is showing a Upthrust…of course not a one of the ideal one. But
distinct weakness shown on the nifty.
What is an UPTHRUST BAR ?
An Upthrust Bar is a wide range bar, with a high volume and closing down. It indicates
that the prices were marked up during the day (for simplicity we use day, it is equally
applicable on all time frames), the Trading activity was High as indicated by the High
volume and the prices dropped to near the low (or to the low) towards the closing hours.
Looking the SM perspective what happened was that the SM marked up the prices in
early trading hours indicating strong bullishness. Enticed by this bullish move the weak
money also rushed to acquire the stock. Shorts if any would also have rushed for cover.
Meanwhile the SM is quietly distributing their holding to the weak money. In the later
part of the day the SM drastically marks the price down trapping the weak money holding
stocks at much higher prices.
In order to make this ideal, the Upthrust normally appears after a wide range upbar with
high volume. This makes it easy for the SM to markup the price and entice the weak
money. Most of the time the Upthrust will be moving into new higher territory. The High
of this bar will be much higher than the previous high.. High volume should be an
important consideration.
What are the Things to Looks for in a Uptrust?
1.
2.
3.
4.
5.
6.
High Volume and How high?
Wide Spread?
Close, near or on the Low?
What was the previous bar action?
Did the bar into new territory?
Is the stock in an up trend?
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
The Answers for the above would decide how potent the Upthrust is.
High volume Upthrust are a sure indication of weakness, higher the Volume the stronger
the indication. It may be even wise to get out of the stock if the Upthrust has ultra high
volume.
Wider the spread more potent the Upthrust
Lower the closer the stronger the indication of weakness. Ideally it should close should
be the Low. If the close is towards the middle it would mean than the SM was not
successful in marking the price down. There was too much demand.
An ideal Upthrust will move into new territory. The High will be very much higher than
the high of the previous bar. This means the SM was really successful in marking the
price up and many traders get trapped into bad positions in the end of the day.
Upthrusts are effective when the trend has been in force for some time. Sometime you
would find weak up thrusts in early trends.
Many times you will Upthrusts with low volume. I call them Pseudo Upthrusts. These are
not effective as the Upthrust. But are still signs of weakness..
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
Mike adds….
Pseudo upt hrust s will generally occur w hen price is t r eading t he fringes of a previous known area of supply
( resist ance) from below . This can be confir m ed from t he price act ion and pivot s on t he left . I f price has reached t he
fringes of a known resist ance area on t he previous day, you would do well t o look out for t he open t he next day and
WAI T! . The SM has t wo choices,
( a) To gap up t he open above t he old r eist ance. This indicat es t he SM's com m it m ent t o bullishness. This is t o
discourage selling by t raders w ho are holding st ock at previous resist ance price range in t he hope for m ore gains!
But herein lies t he delicat e balance, You hav e t o wait t o see if t he m arket m akers ar e selling int o t he gap or not and
if t he SM is prepared t o absor b t he selling.
( b) To open near previous close and t o m ar k up t he price rapidly . This indicat es t hat t he SM is not very bullish and
is probing upw ards in t he resist ance zone t o see t he m ark et react ion. Depending on t he react ion, t he SM w ill decide
upon furt her course of act ion. I f t he volum es are m edium t o m edium - high and t he price is not m oving up ( ie high
equal t o or not t oo m uch great er t han prev ious high) t hen it 's t im e t o j um p ship as t he aim of SM t his t im e is not t o
gun shor t s st ops ( if t hey m anage it t hen it 's a bonus) but t o dist r ibut e as m uch st ock as possible before t he
int er m ediat e down t rend set s in ( as it invariably will) .
I n bot h t he cases it is bet t er t o wait & wat ch t ill alm ost t he final out com e, as no am ount of t ape reading ( in t he
absence of lev el 2 t rading scr een) or volum e analy sis will give a very clear pict ure in t he int raday t im efram e.
Pseudo upt hrust s w ill rarely occur in areas of new price t er rit ory. That is not t o say t hat Pseudo upt hrust s ar e not
pot ent .
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
We looked at t he Upt hrust and Pseudo Upt hrst s.. We also looked at what t o look for
in an Upt hrust Bar.
The obvious next quest ion would be “ What t o do when we see an Upt hrust ” .
The next bar aft er t he UPt hrust is very im port ant . That helps us decide our act ion.
I f t he next bar is a Downbar closing down it is clear t hat t he weakness and set in and
t he im m ediat e t rend is reversing. Here again t he volum e is an im port ant indicat ion.
I f t he volum e is high t hen it t im e t o get out and wait t o short . I f t he volum e is low
t he weakness is not so pronounce and it m ay be wort hwhile t o wait and wat ch next
bar m ovem ent . Here t he spread and t he posit ion of Bar also give clues. I f t he Bar is
wide closing down t he weakness is m ore pronounced. Also if t he high of t he bar is
t owards t he low of t he Upt hrust bar t he weakness is enhanced.
I f t he down bar is wit h low volum e and closing Up t hen t he weakness of t he upt hrust
bar is st ill in quest ion. We have t o wait for t he enxt bar for confirm at ion.
I f t he Bar aft er t he Upt hrust bar is an Upbar closing up t hen it would m ean t hat t he
weakness proj ect ed by t he upt hrust is negat ed.
Let us look at anot her indicat ion of weakness. I f t he st ock has been m oving up on a
high volum e and t hen we encount er a down bar closing down t owards low on high
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
volum e is a sign of weakness. Volum e need not be very high. I deally t he volum e
should be higher t han t he previous t wo bars.
I f you look at t he enclosed chart t he st ock was m oving up on higher volum e. Then
we have t he down bar closing down near t he low. The volum e is higher t han t he
previous t wo bars. Looks like t he SM have been dist ribut ing. The next bar looks m ore
like a t est for supply. The volum e is low and t he st ock closing up. The low volum e
indicat es supply is lower. Then again a downbar on higher volum e. The weakness is
m ore pronounced now. What followed is obvious…
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
N O D EM AN D BAR
Next we will look at anot her indicat ion of weakness, t he “ No Dem and Bar” .
According t o t rade Guider/ t om William s an I deal No dem and bar is a Upbar bar wit h
narrow spread closing in t he m iddle or lower and t he volum e is less t han t he volum e
of t he previous bars. Though t his is t heir basic definit ion I have seen subt le
difference in t he No Dem and bar t hrowing up different com m ent aries.
But in general any narrow spread low volum e Upbar closing in t he lower half of t he
bar indicat ed No dem and.
What does t his no Dem and Bar indicat e?
A no Dem and bar indicat es t hat t here is no support from t he SM. The SM is not
int erest ed in higher prices and t hey are support ing t he st ock. What ever buying or
selling is from t he st ray weak m oney ent ering and exit ing.
Consequent ly t his indicat es weakness. The No Dem and bar does not indicat e any
im m ediat e reversal. While analyzing a No dem and bar we have t o look at t he
prevailing background.
Does t he background reflect weakness in t erm s of Upt hrust or Pseudo upt hrust ? I f
t he background is weakness t he No Dem and bar indicat es enhanced weakness.
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
I f t he background does not show weakness t he No dem and bar does show weakness
and does not necessarily indicat e reversal. I t only shows lack of part icipat ion from
SM. We m ay soon see t he SM m oving in t o t ake t he st ock up furt her. So it would be
wait and wat ch t im e.
We will explore a lit t le m ore on weakness indicat ions. Upbars wit h high volum e wit h
narrow spread and closing in t he m iddle or low indicat es t hat supply is swam ping t he
dem and. This kind of bars would norm ally be seen near resist ance lines. This by
it self does not port end great weakness. But t he following bars would indicat e
whet her t he supply is persist ing or not . Persist ing supply would definit ely reinforce
weakness. Enclosing t he chart of L&T for t he recent t im es when supply cam e in at
t he resist ance line. The next bar shows t hat supply has decreased which encouraged
t he SM t o push furt her. But t he m ove falt ered at t he next level.
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
Let us m ove on….
Current ly we are discussing weakness. One last indicat ion before we t ake up
st rengt hs is called “ Effort wit hout Result ”
Aft er accum ulat ion phase is over t he SM get s ready for t he Mark Up Phase. I n order
t o m ove t he st ock up t he SM has t o put in som e effort . The effort t o m ove t he
m arket up can be seen as wide spread upbars closing near t he t op wit h increased
volum e. The volum e would never be excessive. I t is easy t o ident ify t hese bars.
I f t he “ effort t o m ove up” result s in t he st ock m oving up, t he effort has yield t he
desired result . Many t im es you will find an effort t o m ove up bar and t he next bar
would be high volum e bar closing near t he low indicat ing large supply com ing in
swam ping t he dem and. So t he effort t o m ove up has not yielded t he desired result .
Frequent ly you would find such a sit uat ions at high resist ance / high supply areas.
These Effort s wit hout result are good indicat ions of weakness. Most of t he t im es you
will find t he st ock m oving down or side ways aft er t his failure. This is because t he SM
would rat her wait for t he supply t o vanish before repeat ing t he effort . The SM will
t hen t est t he m arket for supply before t rying t o m ove up furt her. The repeat m ove
could be good ent ry point s.
Act ually t hough t he VSA does not t ake int o account t he OPEN, I have not iced t hat an
ideal “ Effort t o Move up” bar would open near t he low and close up near t o high. This
is a deviat ion I have t aken from t he general VSA concept .
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
Now let us m ove on t o t he indicat ion of st rengt h. One of t he m ost powerful indicat ion
of st rengt h is t he “ Test ing for Supply” .
Aft er down t rend when t he SM has accum ulat ed enough and is ready t o m ove t he
st ock up again t hey t est if t here is st ill supply present . Also in an upt rend if t he SM
encount ers large supply t hey would pause t ill t he supply disappears. Then t hey
would check again t o see supply is present .
The Test ing for supply is done by rapidly m arking down t he price. I f t he
st ock recovers t owards t he high and t he volum e is low it would m ean t hat t here was
no supply. I f t he volum e is high and if t he st ock fails t o recover it would m ean t hat
t here st ill supply present . Low volum e or less t rading act ivit y indicat es a successful
t est .
A TEST bar t ypically dips int o a previous high volum e area and recovers t o close near
t he high on low volum e.
A t est bar viewed in isolat ion does not signify anyt hing. I t necessary t o look at t he
background t o ascert ain t he st rengt h of t he Test bar. I f t here has been absorpt ion
volum es j ust before t he Teat bar t he st rengt h of t he t est bar becom es m ore
significant .
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
STOPPI N G Volum e
Now we will m ove furt her. The next VSA indicat ion we will discuss is called t he
St opping volum e, also called absorpt ion volum e.
Norm ally in a down t rend you will see a down bar wit h high volum e bar closing on
t he upper side. This is called a St opping volum e. This indicat es t hat t he SM is
absorbing all t he st ocks. The SM has decided t o st art t he gam e all over again and
have decided t o st op t he down t ide and st art accum ulat ing. As a result t he st ock will
soon see side ways m ovem ent or go int o a long accum ulat ion phase. I n effect t he
st opping volum e or absorpt ion volum e indicat es t hat t he long bearish m ove is likely
t o end soon.
An I deal St opping Volum e bar will be down bar wit h high volum e and closing near
t he t op. However m ost of t im es you would see t he close on t he upper half of t he bar.
St opping volum e occurs aft er long down t rend. St opping volum es are basically alert
t o t he im pending reversal.
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
Next we will look anot her indicat ion of st rengt h called a Reverse Upt hrust . Users of
TG will not find t his in t heir soft ware. However I do find it a useful indicat ion.
Just like t he Upt hrust bar we will find in a bearish m ove a High volum e wide range
up bar wit h t he low chart ering int o new lows and t he closing will be near t he high.
This is a good sign of st rengt h ret urning and you find t he t rend reversing alm ost
im m ediat ely.
The reverse Upt hrust is rare and is found rarely at bot t om s. Finding t he bot t om is
m ore difficult t han finding t he Tops. Most of t he t im e t he bot t om s will see st opping
volum es, som e sideways m oves and m ult iple t est s before we see a reversal of t he
t rend. I t is also com m on t o see consolidat ion bases at t he bot t om s.
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
Any high volum e wide range upbar in a down t rend would indicat e st rengt h. However
t hese kinds of bar can be seen any where in a down t rend. I t could appear before t he
t em porary bounces / ret racem ent s during t he downt rend. The difficult lies in t he
recognizing t he st rengt h ret urning aft er t he bot t om s.
Next I ndicat ion we are going t o look at is called “ No Supply” . As t he nam e signifies
t his bar indicat es absence of supply and indicat es st rengt h.
The No Supply bar is a narrow range low volum e down bar closing in t he lower half.
The No Supply bars are found in t he early Bot t om reversals and indicat e st rengt h. I t
is also com m on t o find t hese bars in an up t rend which are indicat ions of
cont inuat ion of t he t rend. They would also be found on consolidat ion bases.
A No Supply indicat ion has t o be read in cont ext wit h background. At bot t om
reversal areas t hey indicat e t here is no supply available. Then t he SM get s ready for
m ark up. Hence t hey indicat e st rengt h especially if t hey appear before/ aft er t est
bars.
During up m oves a No supply could indicat e non part icipat ion from SM. I MHO t his is
one of t he difficult indicat ion t o int erpret .
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
SUPPORT & RESI STAN CE
I t is widely believed t hat SM respect s t he support and resist ance areas.
Before we proceed wit h Support and Resist ances wit h regards t o VSA let us look at
som e basics about support and resist ances.
The general pract ice followed by m ost of us is t o draw lines from previous swing
Highs and Lows ( or high and low pivot s) . Once t hese lines are t hey are t aken as
Support and Resist ance lines .. I repeat ….LI NES… I MHO t his is one of t he basic folly
we m ake… The quest ion we ask here is “ How can a single price act as a Support or
Resist ance Line ?” I t is like assum ing t hat in case of resist ances t here are a huge
num bers of people holding t he st ocks at t his part icular price and early wait ing sell.
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
A m ore reasonable assum pt ion would be t hat t here are m any holding t he price at
and around last swing high. So t here would be a area or a zone of supply/ Dem and
rat her t han a single price. I n case if t he last swing high was an Upt hrust bar t he
whole range off t he bar could becom e a supply rich area.
The point here is t hat not all swing Highs and Swing Lows offer Resist ance / Support .
A swing high can be considered as a resist ance only if t he price react s at t hat level.
Till t hen a swing high rem ains a swing high. Sam e is t he case for t he Support s.
Swing lows becom e swing lows only if t he price react s at t hese levels
Enclosed is chart s explaining t his concept ..
Please feel free t o express cont rary views if any… More on Support and Resist ance
Lat er
An im port ant t hing t o not e here is t hat t he Resist ance areas do not represent large
supply wait ing t o be dum ped. I n t he sam e way t he Support areas do not represent a
huge dem and wait ing t o lap up all t he supply com ing in.
I t is bet t er t o consider t he resist ance areas are zones where selling pressure increase
and support areas represent zones where buying pressure increases.
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
Now t he quest ion is what Resist ance and support has t o do wit h VSA? As m ent ioned
earlier t he SM generally give due respect t o t he Resist ance and Support areas as
t hey represent zones of Selling pressure and Buying pressure.
I n general increased volum e wit h increased spread as t he st ock approaches a
resist ance area is a bullish sign. Falling volum e and decreased spread would m ean
t hat st ock would be st alled at t hese areas.
I n t he sam e way decreased volum e and spread as t he st ock approaches support area
is sign t hat t he st ock would t ake support in t hat area and reverse. I ncreased volum e
and spread would indicat e t hat chances of t he st ock breaking t he support are m ore.
I f Resist ance areas are crossed wit h high volum e it is a sign of bullishness and if t he
crossing is wit h low volum es caut ion is advice. I n t he sam e way if support s are
broken wit h high volum e it is a sign of bearishness and low volum e crossing should
be viewed wit h caut ion. Going short on a low volum e break of support could result in
a bad t rade.
The SM oft en at t em pt t o push t hrough t he Resist ance areas wit h a huge volum e.
These are clearly evident on t he chart s in t erm s of high volum e wide range bars.
I n general it always pays at t ent ion t o resist ance zone even if you are using you own
t rading syst em s. When “ Buy’ signals are generat ed near resist ance zones one has t o
be careful.
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
TREN D LI N ES
Next we are going t o look at t rend lines. We all use Trend lines and t rend line breaks
t o decide reversals. We will look at t rend lines wit h respect t o VSA.
The general belief in TA is t hat Trend lines offer support in up t rends and also act as
resist ances in downt rends. We will not go int o t he det ails of why and how of t his
belief. I nst ead we will look at t he how volum e and spread can give us clues whet her
t he t rend line will hold or break.
For exam ple we will t ake an upt rend. When t he st ock ret ract s t owards t he t rend line,
sm all spreads and lower volum e indicat e as t he st ock approaches t he t rend line
indicat es t hat t he st ock is likely t o be support ed by t rend line. Higher volum es and
wide spread indicat e a probabilit y of a t rend line break. Trend lines are resist ance
areas and effort is needed t o break t he t rend lines. Wide spreads and high volum es
are indicat ions of t his effort .
Many t im es we will see t he SM absorbing t he supply near t rend lines. This is a bullish
indicat ion as t he sm art m oney is bullish on t he st ock and is int erest ed in higher
prices. So when t here is lot of supply near t rend lines t hey absorb t he supply t o keep
t he prices above t he t rend line.
Let us look at an exam ple wit h a chart
A) We can see t hat t he volum e is decreasing and t he spreads are narrower as
t he prices ret race t owards t he t rend line.
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
B) Here t he volum e is increasing as t he prices approach t he t rend line. This
would suggest increased probabilit y of a Trend line break.
C) We have a bar wit h increased volum e and closing near t he low. This bar
indicat es t hat t here is increased supply. The next bar is an effort t o Rise bar.
This would m ean t hat t he SM is int erest ed t o keep up t he price and t hey have
absorbed t he supply on t he previous day. Ent ry / Adds on such effort t o rise
bars near t rend line oft en result in a good t rade.
D) Here t he volum e is sim ply t apered off. There seem s t o general lack of int erest
on all sides. ( This are area shows a failed t est and no dem and bars indicat ing
a general weakness) . However volum e cam e in near t he t rend line and st ock
is again going up t owards t he right edge.
Re ve r sa l a n d Re t r a ce m e nt
One of t he difficult ies we face when analyze prices is det erm ining whet her t he st ock
is going t hrough a reversal or j ust a ret racem ent . I f we assum e t hat a ret racem ent is
in progress and it t urns out t o be a reversal we end up giving away t oo m uch. At t he
sam e t im e if we assum e a reversal t hen we would be out of t he t rade t oo soon.
These apply specially for posit ional t raders.
So how do we get a clue whet her it is ret racem ent or a reversal? Following are t he
basic t hings one should look at .
RETRACEMENT
1. Lack of volat ilit y
2. Sm all spreads
3. Decreased Volum e
REVERSAL
1. I ncreased Volat ilit y
2. Large spreads. Especially Effort t o Fall bars.
3. I ncreasing volum e.
The sim plest t hing we can do is t o draw arrows for t he st ock m ovem ent and t he
volum e. I n ret racem ent s you will t he arrows are in t he sam e direct ion. And in case of
reversal t he arrows will be in opposit e direct ions.
Just enclosing an exam ple.
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
TREN D CH AN N ELS
Next I will t ouch on t he concept of t rend channels. Tom William s briefly m ent ions
t his in his book. He calls t hen Trading Ranges t hough I prefer t he t erm Trend
channels as in we will find t he st ock is act ually t rending up or down when we look at
from a wider view. This is act ually different form t he horizont al t rading ranges where
t he st ock m ovem ent is sideways. Of course I have t aken som e deviat ion from his
concept s.
Many t im es you will find a st ock m oving in a upward or downward channel. We can
draw upper t rend lines and lower t rend lines and t hey would alm ost be parallel. Tom
William s divides t his channel int o upper quart er and lower quart er and m ost
react ions happen in t hese quart er. He also calls area above t he upper t rend line( or
supply line) as over bought zone and t he area below t he lower t rend line as over sold
zone. The m iddle area is where we can expect t he st ock t o m ove anywhere.
But I go a st ep furt her and I draw a m iddle line. The int erest ing observat ion here is
t hat it is around t his m iddle or m ean line where m ost we see a conflict or t ug of war
bet ween t he bulls and bears happen and m any react ions happen around t his line. I
call t his t he “ Conflict Zone” .
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
….
From a VSA perspect ive we will find support or st rengt h com ing near t he bot t om
t rend line. We will also see weakness creeping in in t erm s of upt hurst bars or pseudo
upt hrust bars near t he upper t rend line. I n m ost cases t he Trend channel is wide
enough t o give som e nice t rade opport unit ies.
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
TRAD ABLE BASES
Accum ulat ion bases can be found in various shapes and sizes. The m ost com m on
recognizable one is t he one where t he st ock m oves sideways in a narrow range and
t he volum e has dried up.. However we will also find rect angular bases where t he
st ock m oves up and down but rest rict ed wit hin a wider range. You will find weakness
com ing in at t he t op of t he range and st rengt h at t he bot t om of t he range.
Many of t he ranges are easily t radable. For a t rader or invest or wit h longer t erm
view t he idle t im e t o get in would be when t he st ock bounces back from t he support
line. This way it t he st ock breakout he would have t he idle ent ry point . He also has
t he opt ion t o quit at t he st ock fails t o cross t he resist ance at t he range t op, For a
short t erm t rader who is adapt in t rading t he long and short t his kind of base
provides good opport unit ies t o go long at t he support line and go short at t he t op of
t he range.
Just like t he Trend channels described before we can find a zone in t he m iddle of t he
range which I call t he conflict zone where m any react ions t ake place.
Here is j ust an exam ple of t radable base. More t radable bases will be covered in m y
ot her t hreads.
KARTHIK MARAR
VOLUME SPREAD ANALYSIS
KARTHIK MARAR