Tag Archives: volume analysis

2 Steps to a High Probability Trade Set-up | 15th September, 2017

This is my favourite trade set up. Here’s what to look for and why.

Gold Monthly 2017
Click chart to enlarge.

To begin, look for a trend line which has strong technical significance. In deciding how strong or weak a line is use these guidelines here.

This trend line on Gold’s monthly chart is drawn as a bear market trend line as illustrated here.

Gold Daily 2017
Click chart to enlarge.

Zooming on at the daily chart level to see exactly where the line sits, we can see that price is not sitting perfectly upon it. That may be because this trend line extends so far back, to September 2011. The general idea does appear to be working here today though.

This is the trade set up:

Step 1.

Look for a breach of the trend line. If this is achieved on strong volume, then have more confidence in the breach. StockCharts data does show very strong volume for the 5th of September, which is the daily candlestick on their data that would have been the day of the breach.

Step 2.

Look for price to curve around and back test support at prior resistance (or in a bear market resistance at prior support). Enter in the direction of the larger trend when price tests the trend line.

This set up takes time. In this case a wait of 7 to 8 days after the initial break above the trend line.

Today, the long lower wick and bullish engulfing candlestick pattern offer a little more confidence in this set up.

Why is this such a good trade set up?

With a technically significant trend line, the set up offers an entry point to a trend which traders may have confidence in. The more significant the line, the more significant the breach.

Stops may be set quite close by. Allow a little room for overshoots, and for longer held lines slightly larger overshoots, but stops may be closer than the last swing low or high. This reduces risk.

Published @ 01:15 a.m. EST.

Volume and Breakouts – Is it Necessary? | 11th August, 2017

This chart was published two days ago. At that time, it was warned that the possible upwards breakout of the 8th of August lacked support from volume and may turn out to be false:

S&P500 Daily 2017
Click chart to enlarge.

That was proven correct. The strong downwards movement from the S&P comes on a day with an increase in volume. This is a classic downwards breakout.

When a downwards breakout has support from volume, that adds confidence in it. Downwards breakouts do not require support from volume; the market may fall of its own weight. Price can fall due to an absence of buyers as easily as it can from an increase in activity of sellers. But when volume supports downwards movement, it may be more sustainable, at least for the short term.

This downwards breakout was predicted by strongest volume during the consolidation being a downwards day.

This volume analysis technique looks at the presence or absence of support from volume on the breakout after a consolidation period to tells us how reliable the breakout may be.

Published @ 12:17 a.m. EST on 12th August, 2017.

Volume and Breakouts – Is it Necessary? | 9th August, 2017

After a consolidation price will break out. The presence or absence of support from volume on the breakout tells us how reliable the breakout may be.

Gold Daily 2017
Click chart to enlarge.

Pennant patterns are one of the most reliable continuation patterns. But in an upwards trend the breakout should have support from volume.

For price to keep rising it requires increased activity of buyers. Upwards breakouts that do not have support from volume are suspicious.

This upwards breakout comes on a day with slightly higher volume, but the balance of volume for the session is downwards. Stronger volume during the session supported downwards movement, not upwards.

The breakout is suspicious and may turn out to be false.

While volume is important for upwards breakouts, it is not so important for downwards breakouts. The market may fall of its own weight.

Published @ 04:47 p.m. EST.

Volume Basics | 2nd August, 2017

Volume analysis is essential to a full technical analysis. One of the simplest techniques is to look at volume during a consolidation and note which days, upwards or downwards, have strongest volume.

Gold Daily 2017
Click chart to enlarge.

Gold has been within a large consolidation since about January 2017. A small resistance zone is about 1,295 to 1,300. A wide support zone is about 1,195 to 1,215. During this period of time, it is two upwards days that have strongest volume and this suggests that an upwards breakout may be more likely than a downwards breakout.

This technique does not always work, but it works more often than it fails. This technique is an exercise in probability and not certainty.

Published @ 04:00 a.m. EST.

On Balance Volume (Beyond Volume Basics) | 23rd June, 2017

Volume alone is not always a clear indicator. It is necessary to add another volume indicator, like On Balance Volume, to add depth to volume analysis and improve accuracy.

Gold Daily 2016
Click chart to enlarge.

On Balance Volume can be used in two ways.

1. When On Balance Volume creates a range draw trend lines across its highs and lows. A breakout by On Balance Volume can sometimes precede a breakout from price, so On Balance Volume can be a leading indicator. Other times On Balance Volume may break out with or after price, it can then be a confirming indicator. Used this way On Balance Volume works very well.

2. Divergence between price and On Balance Volume can be used to indicate weakness and an impending trend change. This divergence can persist for some time prior to a trend change, so it is not useful in picking highs or lows.

Trend lines are drawn on On Balance Volume in the chart above. Resistance is in purple, support in yellow. A long term line is added in pink.

Bullish signals are noted in green arrows on price:

1. Halfway through an upwards trend On Balance Volume breaks above resistance which was prior support. This adds some confirmation to the trend. Traders may have more confidence in long positions.

2. A long term trend line which previously provided support, then resistance, is breached. This adds confidence in the upwards trend continuing.

3. A long term trend line is touched after some time. The bounce up and away is bullish.

4. A breach of resistance is a bullish signal. This illustrates that this technique does not always work. Price continued higher for only one more day before a major reversal.

Bearish signals are noted in red arrows on price:

1. A breach of support is a bearish signal, which should confirm the downwards trend. But a low is found the next day. Again, this technique works more often than it fails, but it can fail.

2. A break of a long term support line halfway through a downwards trend offers confidence in short positions.

3. Another break below a support line offers confidence in the downward trend.

In addition to breaches of trend lines, tests of support and resistance also offer signals.

Using On Balance Volume in conjunction with volume bars adds considerable depth to analysis.

This analysis is published @ 03:41 a.m. EST.

Volume Basics | 21st June, 2017

The activity of buyers is required for price to rise sustainably. This is indicated by increasing volume on upwards days.

The opposite isn’t necessarily true for a falling market. Price can fall due to an absence of buyers, just as it can with increasing activity of sellers. Rising volume with falling price is good to see as it supports the trend, but it is not necessary.

Does Gold’s price and volume conform to this basic principal of technical analysis?

Gold Daily 2016
Click chart to enlarge.

1. This first rise in price is close to textbook perfect. The trend is well supported by volume. Volume does not increase in a straight line each day; some days are lighter than the prior day, but overall there is an increase.

2. This next rise is not so clear, but there is still overall an increase in volume as price rises. Volume is lighter than the prior stronger trend though, so the deep pullback that followed should not have been entirely unexpected.

3. As price falls initially volume declines and then shows some steady increase. The fall in price has support from increasing selling activity.

4 & 5. As price rises volume is not clearly rising. Sometimes the market can drift higher on light volume, so this type of rise is suspicious. The following deep decline again should not have been entirely unexpected.

6 & 7. As price falls volume declines. The market is falling of its own weight.

8. At the end of the fall volume begins to increase.

9. The start of the next rise has some support from volume by day 5. This shows an increase. However, the fifth day volume spike may also be a blow off top signalling an end to the rise temporarily. Blow off tops are not usually the very end; they usually signal a period of consolidation before the trend has a final rise.

The area between 9 and 10 is very unclear, with choppy overlapping price action generally trending higher and mostly flat volume.

10 & 11. As price falls volume declines. The market is mostly falling of its own weight.

When volume clearly supports a trend, then more confidence may be had in it. When volume does not support a trend, it is suspicious. Lack of support from volume will not tell when price will change direction, but it can warn that price may likely change direction and not just consolidate.

This analysis is published @ 03:51 a.m. EST.