CHARTS, TRENDS, AND PATTERNS - Section 2 - Chapter 11,12 - Volume Analysis

1. Lecture - 21
Volume Confirmations
CMT LEVEL - I

2. CMT LEVEL - I
Learning Objectives
 Volume Confirmation
 How Is Volume Portrayed?
- Bar/Candle
- Equivolume
- Point and Figure
 How change in volume be
interpreted?
 How Are Volume Statistics Used?
 Volume indicators and Index

3. What is Volume?
• Volume is the number of shares or contracts traded in a security or
an entire market during a given period of time.
• For every buyer, there is a seller, and each transaction contributes to
the count of total volume.
• Volume is an important indicator in technical analysis as it is used to
measure the relative worth of a market move.
• If the markets make a strong price movement, then the strength of
that movement depends on the volume for that period.
• The higher the volume during the price move, the more significant
the move.

4. How volume is Plotted?
Bar
/Candle
Equi
Volume
Point &
Figure

5. Bar & Candle
•Most common Portrayal
of Volume is a vertical
bars representing the
total amount of volume
for that period at the
bottom of the price
chart.
• This method is simple
and assumes no direct
relationship between
price & volume.

6. Equi Volume
• Equivolume, a charting method introduced by Richard Arms, takes the
unique approach of substituting volume for time along the bottom
scale of a chart.
• When volume increases, the price bar is elongated to the right;
therefore, an upwards move on high volume will appear as a higher
box that is also wider.
• EquiVolume charts look similar to candlestick charts, but the
candlesticks are replaced with Equivolume boxes that can be square or
rectangle.
• Its easier to verify volume for reversals, big moves, support/resistance
breaks, and climaxes.

7. Equivolume Calculations
• An EquiVolume box consists of three components:
price high, price low and volume.
•The price high forms the upper boundary, the price
low forms the lower boundary and volume dictates the
width.
•EquiVolume boxes are black when the close is above
the prior close and red when the close is below the
prior close.
•volume is normalized to show it as a percentage of the
look-back period.

8. Equivolume Calculations

9. Equivolume Calculations

10. Point & Figure
•Point & Figure Charts by their nature do not include
volume .
•The Standard method is to sum the volume that took
place while each box was in effect and portray it on
the charts.
• The Analyst using this method must determine
whether this information is helpful.

11. Standard Interpretation of Volume
Volume Price Interpretation
Rising Rising Volume Confirms Price Rise
Rising Falling Volume Confirms Price Drop
Falling Rising Volume Indicate Weak Rally
Falling Falling Volume Indicate Weak Pullback

12. Standard Interpretation of Volume
• Volume confirms direction. When volume declines, it
indicates that a change of direction should follow
because there is no general support for the price
move.
• Price changes that occur on very light volume are less
dependable for indicating future direction than those
changes associated with relatively heavy volume.
• In futures and stock markets, volume has the same
interpretation: When volume increases, it is said to
confirm the direction of prices.

13. Volume Is a Predictor of Volatility
• Most often high volume and high volatility occur at the same time. It is easy to
see on a chart that one confirms the other.
• Not all days that have high volume also have high volatility. Even on days with
high volume, the price can close nearly unchanged from the previous day.
• Days as a sign of potential volatility—a large number of traders all with their
own objectives somehow managed to offset each other.
• If there is an imbalance in the buyers and sellers, and volume is still high,
prices could break out in either direction.
• Therefore, high volume means high risk, even on those days when the risk
does not materialize.

14. Volume Is a Predictor of Volatility
• Most often high volume and high volatility occur at the same time. It is easy to
see on a chart that one confirms the other.
• Not all days that have high volume also have high volatility. Even on days with
high volume, the price can close nearly unchanged from the previous day.
• Days as a sign of potential volatility—a large number of traders all with their
own objectives somehow managed to offset each other.
• If there is an imbalance in the buyers and sellers, and volume is still high,
prices could break out in either direction.
• Therefore, high volume means high risk, even on those days when the risk
does not materialize.

15. Average Volume
Basic of all volume indicators is the average, and the
calculation most commonly used for the equity markets is
50 days, although it may be reasonable to use the same
period as the price average that is being used.
 Normalizing the Volume
 Letting the calculation period, N, be either 50 or 200 days,
we can normalize the volume and represent the result as a
percent
 The normalized volume lets us say that “today's volume is
20% higher than the volume over the past 200 days.”

16. Average Volume
Volume Momentum and Percentage Change
 For momentum, this means finding the change in
volume over a specific time interval; percentage
change measures the size of the volume change
relative to the starting value. If t is today and n is the
number of days back
 High variance in volume from day to day, volume
momentum tends to increase the erratic pattern. It
will be necessary to smooth the volume momentum in
order to have a useful indicator.

17. Volume Spikes
•A volume spike is a single day on which the volume
was much higher than the previous day—at least twice
as high, perhaps three or four times
• A volume spike is a warning that something
happened, most likely the result of a surprising news
release or new economic data.
•A volume spike is a clear, positive action by investors.

18. Volume Spikes
•It implies that a very large number of investors,
perhaps even the general public, all hold the same
opinion on the direction of the market and feel
compelled to act on that opinion at the same time
• A volume spike means that everyone has jumped into
the boat at the same time.
•Traditional interpretation of a volume spike is that it
indicates the end of a price move, that is, the boat
sinks.

19. Volume Spikes on Breakout
• Breakouts are usually obvious .
•High Volume on a gap or on a breakout from a
preexisting chart pattern is usually the sign of a valid
breakout.
•Many analysts use a spike in volume as a confirmation
of the breakout and ignore those without volume
spike.

20. Volume Spikes & Climax
• A climax is a market condition that is characterized by
escalated trading volume and sharp price movements
at the end of a bull or bear market cycle for an index or
security.
• Climax Occur with one of the short term reversal
patterns.
• These are price spikes , pole , two bar reversals ,
exhaustion gaps , key reversals and any other patterns.

21. Shock Spiral
• We look at the dead cat bounce (DCB) , we saw that a
substantial volume spike occurs prior to the formation.
• DCB occurs after a shocking news announcement
causes a sudden and dramatic shift in price direction
usually accompanied by a large gap or price spike .
• An extreme spike in volume accompanies that sudden
shifts.

22. Volume Price Confirmation Indicator
•VPCI plots the relationship between price trend and
the volume , as either being in a state of confirmation
or contradiction.
• A positive deviation in the volume price confirmation
indicator (VPCI) suggested that the volume was
confirming the price action
• A Negative deviation suggested that the volume was
contradicting price action

23. Volume Dips
• Sharp decline in volume are usually not meaningful .
• The decline in volume generally indicates a decline in
interest in the security which usually decline in
Volatility.
• Traders watching that stock for the sake of increase in
Volatility & volume
• A Volume dip is also typical for action just before a
sudden expansion in price and volume , as in breakout
from a formation.