13 replies to this topic

[unosuke]

Benchmarking volume is a two way street. You benchmark how the market goes down versus how it went up; and you benchmark how it goes up off of how it came down.

It's all about gauging where the force is in the market. Quality of Volume to me simply means the condition where price moves with relatively higher volume against a price point and especially a swing point. It's based on the logic of supply and demand - if there's a genuine desire to break and hold a swing point, it will be reflected in greater supply (volume) at that level.

So for example, when SPX broke and held the 741.02 swing low on a weekly, it had about 8% higher volume, which makes it a Quality of Volume move down. This week's bar pushed topside and volume contracted by about 5%. This tells me the force is still downtown.

On a weekly bar, SPX would need to break the Jan. 26th swing high @ 877.86 on Quality of Volume to change the bearish dynamic in the marketplace; or it could test the swing low @ 666.79 on lighter volume and close above it to indidcate a consolidation between the low and a higher price point.



In evaluating any chart, it's important to identify signs of strength and signs of weakness. Both are simply bars with wide price spread and relatively heavier volume (Quality of Volume). They indicate there's force behind a move (real buyers or sellers).

This bear market has taught me how important testing a swing point is when judging a sign of strength or weakness. That's because short covering rallies are characterized by bars pushing price higher with heavy volume but failing to break a swing point. Then if volume dies, that's a heads up that the temporary short-covering is now distribution.

This is evident on the daily SPX chart:



The financial sector (XLF) has produced by far the most short covering rallies since the bear market began. XLF often charges for its last swing high on relatively heavy volume, and then suddenly volume peters out before reaching the swing high and the financials resume tanking.



Switching over to the NDX, it's apparent how each swing high is made on dramatically lighter volume than the referenced downdraft bars.



Those previous charts represent stealth signs of weakness and indications of a pullback. It's been my contention for the past couple of weeks that the energy sector wants to break down, and I believe it will still drag the broad market lower.

Finally, here's a look at the oil sector and its highest weighting stocks.

[goldswinger]

Unosuke,: Amazing insight and thanks for sharing. For me this complements what I primarily use which is several short term (60 MIN) momentum indicators whereI look for concurrency such as CCI, Stochastics and WM. When they all agree and I find divergences flaring , time to get in.....or get out. When I see your volume analysis, it is the icing on the cake which truly confirms trend!. Right now, everything is about to move down next week! EVERYTHING! Goldswinger.

[humble1]

rarely have i seen such a clear explanation, with analysis of current conditions, presented for the "volume" approach to trading. thank you for this; it sets the stage for the fascinating week ahead. at several of the blogs i visit, "volume" is the primary trading tool and has kept many guru's and adherents short or shorting, and/or out of all longs, during the powerful rally last week. and i see that friday seems to have given another "stay short" signal, if i read it correctly. this tool has become so widespread that i see it used from futia's blog, with his supply and demand shock analyses, to daily commentary on CNBS by pisnai and upward to art cashin. my view, fwiw, is simply that the supply of sellers is exhausted and that stocks are now in very strong hands and will continue to go up easily.

[spielchekr]

Legit question, I think. What's better about volume analysis with candlesticks vs. volume analysis with P&F columns?

[Brian]

Legit question, I think. What's better about volume analysis with candlesticks vs. volume analysis with P&F columns?

The way I see it is that the PnF chart is nonlinear in time and, therefore, will give a distorted picture of volume compared to the candlestick method which is linear in time.

[unosuke]

Legit question, I think. What's better about volume analysis with candlesticks vs. volume analysis with P&F columns?

The idea is that markets seek to trade at price points that, 1) have the greatest supply/demand (volume) and 2) remain untested.

So when I look at a price bar on any time frame, I only care about the high and low wrt benchmarking volume. If the bar makes a lower low and lower high than the previuos bar, I regard it as pushing down; if it makes a higher high and higher low, than it's pushing topside.

Any new bar making a higher high or lower low in a move, on any time frame, is technically creating a swing point. Besides benchmarking the price's volume versus how it previously went up or came down, it's important to note how much volume remains at the new untested swing high or swing low. If it's relatively light, it's unlikely to be sought for a test; if it's relatively heavy, a retest is a high probability.

IMO, candlestick charts simply provide the easiest way to identify where price is pushing and where high volume price points remain untested.

Edited by unosuke, 15 March 2009 - 07:41 AM.

[spielchekr]

Thanks for the well-thought replies. I can't dispute that candlestick volume points out the logical battlefronts. They show how much "firepower" is expended at a point of contention, but they don't indicate accumulation or distribution (firepower brought to battle) for a price movement into that point. You guys know better than I how that kind of information is distortive.

[Lee48]

excellent volume and candle work uno, and taking the time to explain. Note to self, buy some dig when XOM makes it back down to 55.91..l Till then, let da tankage begin...

[SemiBizz]

I guess you don't have a chart that features $XOI volume, since this thread pertains to volume analysis, I thought this chart might be helpful.

[unosuke]

I guess you don't have a chart that features $XOI volume, since this thread pertains to volume analysis, I thought this chart might be helpful.

I don't have XOI volume from stockcharts.com. However, I can use other free sites that show volume quite a bit different from your source and which confirms the accuracy of my statement that the Oct. weekly/monthly low has the highest volume:

Btw, how's business?

Edited by unosuke, 15 March 2009 - 02:42 PM.