The Rogue Investor » VSA

VSA: Example of Bullish Volume in UUP

Alex — Thu, 17 Dec 2009 23:18:19 +0000

One concept that is explained in Tom Williams’ book, Master The Markets, is bullish and bearish volume. As defined in the book, bullish volume is increasing volume on up-moves and decreasing volume on down-moves. Bearish volume is the opposite.

If you find a stock where the volume is acting bullish/bearish, you can get a basic idea that the professionals are buying/selling.

Figuring out if the volume is bullish or bearish is only one piece of the puzzle — we must also examine the price moves associated with the volume to really get a full picture of what the professionals are doing with the stock.

I’ve been watching UUP for a while now. It has bounced off a major level of support and has been acting very bullish ever since.

Here is a chart with some trend-lines drawn:

First, the yellow line shows the massive increase in volume over the last several months. This is partially due to the increase in popularity of the ProShares ETFs, but from a technical standpoint, it also shows a major increase in professional activity (mainly buying) at the major level of support.

Next, the neon blue lines show the previous trend channel that UUP bounced within since June.

Lastly, the green line at the end of the blue lines shows the breakout of UUP on the super-high volume.

While it may be incredibly hard to know why the dollar would be gaining strength, it doesn’t matter. All we can do is analyze what we see the market do and react to profit from it.

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Perfect Example of Unhealthy Volume: SII

Alex — Mon, 19 Oct 2009 23:49:37 +0000

I have been mentioning how the volume for stocks has been healthy in my recent posts. While I did try and explain what I meant by this concept, I always learn better with an example so here is one.

Here we have a stock with a very steady average volume level. Very easily you can pick out three days where the volume spiked. The day that I have pointed out on the chart will be the one I analyze.

On this day SII gapped down to finish down 6.7% so normal thoughts would be “this stock took a huge hit and fell more than double the normal price move so the volume, while ultra-high, is still fitting.” This is at least what I thought before learning more about VSA.

The correct way to look at this is to ignore the gap and only use the actual range to analyze the move. Once you do that, it shifts the analysis from normal volume to excessive volume.

The next step is to not just to conclusions or predictions. All we know is that the professionals were active and that when the market is down on excessive volume, strength usually follows. After we wait and see what happens the next day, we know that there was demand in the excessive volume and that the professionals are bullish on this stock.

The rest is history. The stock has rallied over 30% and even had a good looking breakout today.

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CBE Sold, 4% Goal Met

Alex — Wed, 09 Sep 2009 23:00:16 +0000

Today I got out of CBE for a 3.86% profit. I expected to make close to 4% and was very happy with the outcome.

To explain my chart a little further, in VSA you want to see healthy volume. What this means is that the volume should increase in amount relative to how long the stock’s range is. If the stock’s range was about twice as big as normal, you want to see volume about double to know that the move is supported and healthy.

The problem with CBE is that yesterday, the range was wide, but the volume was very excessive and unhealthy. This signals to me that there is selling mixed in with the buying and the supply really came out in today’s price move.

I will continue to watch this stock, but I don’t expect it to move above the resistance.

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Markets Move Higher, Volume Doesn’t Support Action

Alex — Mon, 07 Sep 2009 02:28:03 +0000

The markets finished the week on a strong note with the Dow advancing just over 1%. For the week, the Dow was down just over 1%.

My take of the action is that the bulls aren’t ready to give up the rally and the professionals haven’t taken a new stance. In VSA (Volume Spread Analysis) the volume is supposed to match the price action. What I mean by this is that if the markets move up or down a large amount, the volume should also spike accordingly to signal that the move is healthy and supported.

I always like to use the example I read: If you are driving up a hill and take your foot off the gas, the car will only continue up the hill so long before it starts to roll backwards. If the volume drys up in a rally, it will stall and trend sideways until the professionals take a stance.

Right now, I think we are in a transition period and will see a bit of a see-saw motion. There are still good looking long charts out there like TAP, PSS, and CBE (which I added to my portfolio on breakouts Friday), but the rally can only last so long without significant volume.

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VSA: Ultra-High Volume Analysis

Alex — Thu, 25 Jun 2009 02:32:13 +0000

One of the main tools a technical analyst uses is volume. Coupled with price movements, volume is the key to reading into future direction of the security you are analyzing.

The way I look at volume is that it is the driving force of the market. When we see low volume, the significance of the price movements is greatly reduced as the professionals have no real interest in the stock. On the other side of things, ultra-high volume indicates a high level of activity from the professional market drivers. The key to the whole equation is being able to decode if the huge volume is made up of buying or selling.

To test this, let’s look at an old chart of huge volume on Goldman Sachs:

Click to Enlarge

So, now the question is are you buying or selling GS with that chart? Logic would say sell and run from this nasty chart. The proper move is to wait for the next day for confirmation of weakness:

Click to Enlarge

Hoping that you weren’t stopped out yesterday, GS recovered very nicely making up over 5% the next day. What does that mean? There is no way that the previous day’s ultra-high volume was purely selling if the stock was able to push higher the next day. Therefore, this is a very bullish action showing that the professionals are bullish on the stock and you should expect higher prices.

Here’s the current chart of GS:

Click to Enlarge

As you can see, GS continued to climb after the false sell-off. The bottom line here is when you see huge volume, wait and see what happens the next day. If the stock is up on enormous volume, but then falls the next day, it is weakness and unless buying comes into the market, the stock will fail to move higher.