The Power of Volume Analysis - Part 2

The Unknown Strength of Volume Analysis - Part 2

by Nick Radge

In the last article we discussed two examples of why and how volume can show the changing face of supply and demand. Once the order of supply as well as demand is actually change all of us will get a change in market direction, sometimes a substantial change in pattern or otherwise some degree of retracement of the prior move. We'll now continue on from which discussion and show larger periods of transition which can lead to quite substantial turning points in the major trends. These can be easy to recognize, but do require some patience. If you didn't read the prior article it would now be worth reviewing which before going on.

Let's initially take a peek at AWB Limited.

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Since early 2006, the price of AWB had been inside a downward spiral. The story that eventually came out advised AWB had been doing some bad business against the UN sanction in Iraq. The initial shock sent the actual shares falling by 18% in a single week.

This can be a sure indication of a general change in sentiment and it's not exactly too difficult to know there should have been some kind of bad news that changes the perspective.

But the most important thing here is this significant market off is really the first indication that power may start to appear in the near future. As I discussed in the very first article, need strength actually starts within price weakness and listed here is a sign of capitulation. A broad ranging club on increased volume is a sign of panic and when we view panic we are able to usually anticipate that a good deal could be within the offering, but this is where the patience is required. What we usually start to observe after capitulation is a transition from retailers to purchasers. This changeover has two important features; firstly it takes some time as well as secondly prices do often drift reduce. Let's move into the AWB chart from Area one and also include our quantity indicators.

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Bar 1 is the capitulation; an extremely wide ranging club and ultra high volume. Remember that extremely high volume is signaled when the volume histogram permeates the volume Bollinger band. Bar 2 gaps lower however closes on the weeks high and will so on higher volume. This can be a sign how the Smart Money is interested in purchasing. There is no additional way that prices can near higher on increased volume if buyers were not involved. Bar 3 on the other hand exhibits sellers returning; a push lower, a low close as well as another rise in volume. Bar 4 is the turning point and is a certain sign that buying interest is occurring. This is the time to start thinking that this market may turn greater soon. This particular bar exhibits a move to new levels but an entire rejection, we.e. a high close and incredibly high quantity. We're viewing the Smart Money getting positions, even though the share is drifting lower. Right now take a close look at bars 5 as well as 6. What goes on? Essentially they are inside times with a minor downward bias but look at the volume? There's none. Volume has dried right upward. This means that retailers are done; they're exhausted. Those that wanted to sell have possibly been satisfied or don't want to run after prices any kind of lower. Bar 7 sees another probe lower, an additional high near and yet once again a rapid increase in volume. Combined with bars 2 and 4, both of which display background strength, this is continued evidence that the stock is being accumulated. It's only dependent on time before enough of the provision has been accumulated that prices will start to increase again.

For the following 2 months AWB rallied 34% off that exact low. The first signs of upwards price impetus would be the signal to initiate longs. We have the Smart Money footprints in the volume so we just need to period the admittance for our own comfort. Check out the pubs from which low. All down bars had low volume; all up pubs had higher volume. There is a specific transition from sellers to buyers which resulted in a reasonable, albeit unsustainable, price rise.

The following chart shows that advance in more detail. Bar 8 was a very guaranteeing bar certainly; a wide range higher, a high near and a great increase in volume. With the higher close we can deduce which buyers had the manage. Bar 9 is an important bar for current longs. It shows a good attempted push higher, the reasonably tight range however more importantly the weak near and strong increase in volume. This is the first time that retailers had return to the market. Right now these sellers can originate from 2 sources; possibly profit takers that bought at lower levels, in the end, it was a rapid rise in fast time which will always create profit taking; or it is very old longs who were waiting for the evitable bounce to get out of their positions. We are not to know which, but what we do know is the fact that selling has surfaced and that extreme care is required.

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Bar 10 reveals a rise into new recent levels but a detailed on the absolute lows. This is of extremely important importance - what does it mean? Bar 9 identifies sellers simply because we had the weak close on high volume. Immediately following, Bar 10 exhibits a minimal close upon low volume, which indicates buyers possess disappeared. In the event that buyers have gone, who is going to support the marketplace if those sellers from Bar 9 decide to chase prices reduce? Nobody. When there is no purchaser demand or even buyer assistance then costs have the chance of falling until buyer demand comes back again. And that is precisely what has happened.

Let's move forward to Area 2 exactly where prices fall through the earlier lows set in Area 1. Please make reference to the next chart.

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Bar 11 makes a low at $3.57, has a shut down the levels and exhibits a mild rise in volume. The actual $3.57 level is important because the lows made on Bar 7 were at $3.55 which is in which the prior buying entered the marketplace. It could be very easily argued which we will see individuals buyers back again at this degree. So the minor increase in quantity and a shut down the week's lows is a vital sign once they correspond by having an old reduced to the left. Costs continue to drift lower because weaker fingers stop out below the lows created earlier in the year. However, although Bar 12 closes from the lows it's quite a reduced volume bar not quite conducive to a substantial change in provide and need. Prices proceed sideways upon low quantity until we see Bar 13 take out the main lows and close on those new lows. The difference here is which volume is actually poked up through the volume Bollinger band suggesting ultra high quantity. Again, this might be a sign of capitulation as it's a clear break to brand new lows suggesting sellers in control. But look at bar 14. Is that not the very same thing all of us started to observe on Bar 2 from the first graph? A wide ranging bar lower, a high near and substantial volume. In fact this could nearly be interpreted as a whack-away low, although the range isn't quite wide enough for any text book example of such. Nonetheless it demonstrates that purchasers are in again. The following club is a lower close but volume has dried up - sellers worn out? Bar 15 takes out the lows associated with bar 14 by 2c before rallying hard as well as closing high. Again, volume was very high suggesting which buyers tend to be stepping up towards the plate.

Oddly enough enough this particular current price/quantity activity is happening immediately prior to the findings of the Cole Inquiry. Does the Smart Money know the end result already? Remember in article 1 I suggested that good news tends to precede an autumn and bad news a move? Would the release of the report be considered possibly damaging information? Yes it could. We know the old adage that things look the most detrimental at the reduced and best at the top but it is possible that volume is suggesting that the worst is over and that quite possibly we're likely to start to observe prices trade higher.

The last club on this graph was the release of the report to Parliament. We have a probe above the small ledge however a lower near than the open up and a rapid increase in volume. This is not an immediately great sign because it does suggest strong selling. Therefore we'd need to assess the volume/price relationship of the arriving few weeks in order to better measure the readiness of the purchasers seen at bars 14 and 15.

All in all, the connection and volume/cost is a very strong measure of delicate changes in supply and demand and can lead to both major and minor changes of trend. Consequently it's beneficial for both investors and traders alike to actually understand these types of nuances so they can better position themselves for new deals or provide warning indicators for current trades.




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