Divergence is not necessarily a useful concept here as it implies that price is doing something other than what one might expect from the volume. However, what is more likely is that one is misinterpreting the volume. Volume means nothing more than the number of shares offered. Demand is reflected in the price. For example, if price makes a high, pulls back, then attempts to make a higher high on lower volume than the first attempt, then one might interpret that as a divergence. But all it means is that fewer shares are being offered at this higher price. Demand continues, otherwise price would not be rising. Participation, however, may be less, and that might be cause for concern. What matters more is what happens when price moves in the opposite direction. Are a greater number of shares thrown onto the market, or less? If and when demand asserts itself and attempts to push price higher, is it accompanied by higher volume? Understanding this helps to distinguish between a pullback and a reversal.
You really want to know? That's pretty much it. You don't need, them, of course, if you can recognize a buying or selling climax while it's happening. But even without a climactic move, the third time you can rotate a trendline upward or downward, you are likely looking at an unsustainable rate of ascent or descent, leading to an "oversold" or "overbought" condition (meaning that you are running out of sellers or buyers, whichever the case may be, not that you've reached some indicator reading). The support at that level comes from the tests of it since last October. The demand is reflected in the hammer, i.e., in the fact of it, since the hammer would not have been created without demand coming in at that level. If demand had been weak, you wouldn't have had a hammer.
Would an example of this be this morning from 830 to 935a, where at 845a there was a reverse to the up side with low volume, then another down move and another reverse to the up side at 920, this time accompanied by large volume showing up at 935a ? jr
Not exactly. The 0830 volume represents a potential selling climax. When demand is given an opportunity to show itself, it doesn't much. So price makes a U-turn and continues downward until it hits support, at which point demand does assert itself, creating the hammer. Volume is lower, but still substantial. What's more important than the volume at that point is that price rises. As for the 0930 volume, that has to do with the market open, and there's a tug of war going on between buyers and sellers, resulting in what you could call a fat doji, i.e., you've got long tails on each end. Afterward, of course, strong volume is accompanied by strong demand, i.e., price rises, but it could have shot straight through 1460 on its way to who knows where. Probabilities, however, favored the rise. You'll find the dramas at support and resistance. If price is in limbo, what you wind up with is buyers and sellers poking at the herd to find out where the interest lies and in what direction (this is called "price discovery"). Unless and until the tripwire is found, price will just wander. Whether you want to play that or not is up to you.
dbphoenix, I very much appreciate your time spent on this journal. The charts are excellent and easy on the eyes, and the commentary is first class. Thank you. Q. As I understand what you have said, Volume is understood through the context of the underlying price action. One must first identify through candle formations, barcharts, and trendlines, whether the index is in a bullish, bearish, basing, or toping phase, and then, by applying volume analysis one can identify whether price continuation or reversal is the most likely outcome. Is that correct? Q. At 15:20 on your chart, the market went for a retest of the 14:45 spike, this time there was less demand, which is identified by price not making a higher high and less contracts traded- lower volume. How would you describe this? As no buyer participation or lack of contracts being offered or something else? Q. In the study of price & volume, are you saying that this mornings rally at 9:10 started by a overwhelming lack of sellers not initiating any new positions and , or covering existing short positions, leaving only buyers in command? Q. Why do you think oscillators that use first or second derivatives of price with most not even considering volume as a component become so popular, while Price & Volume arguably two of the most important market indicators largely ignored. Regards, Dave Scott
Not "ceased"; their numbers are just declinining, or at least the degree of their desperation. This is what "oversold" means, running out of sellers. As for defining the exact point that the "bullish trend" could be identified, you could get a lot of discussion out of that. Wyckoff would consider a buy off that bounce to be the best entry, though it's the most aggressive and also carries the highest risk (see also Mamis, The Nature of Risk). Anything after that entails less risk (though a wider stop, which carries its own substantial risk) but less reward. It's a balancing act that every trader must resolve for himself. FWIW, second-best entry would be a higher low. Worse would be buying at the top of the first rally attempt. Anything after that is chasing.
In a very general way, yes. But this isn't the kind of thing that can be explained in a paragraph, much less understood because of what one has read in a paragraph. It takes many, many examples, which is why I decided to forego strategy and spend the time posting charts. Even those few who have written about this don't provide nearly enough examples. At the risk of sounding glib, I'd describe it as people looking for something to do on a Friday afternoon until it's time to go home. I suppose someone could attach great significance to this, but sometimes a cigar is just a cigar. The most logical place for a professional short-seller to cover is at support. He might want to wait until he has evidence that the tide has turned, but by doing so, he will be unable to get the best price on the cover, and he will be unable to get the best price on the reversal to a long position (the SAR, if you like). The more important the support, the more likely that the action there will be important as well. Probability again. So what might otherwise seem overly aggressive might actually seem like a lock, depending on the circumstances. Remember also that most of these people aren't using their own money. The most they have to lose is their jobs. Therefore, they can afford to take risks that might make the retail trader hurl. That's why it helps to know how they think. One can then create, or tweak, a strategy to take advantage of what he learns. Indicator strategies are much easier to employ. Buy when the blue line crosses the red line. One doesn't have to understand it, or even know how the indicator is constructed (how many people who use MACD have read Appel; how many who use a stochastic have read Lane?). PV, however, would likely not be as "difficult" if only beginning traders/investors weren't misled in the first place, being taught that big volume is "good" and that little volume is "bad". Volume gets tied up with intent, when all it reflects is shares traded. The buying and selling pressure is reflected in the price. Besides, if all you used were price and volume, what would all those software vendors do?
Even the most brilliant mathematical geniuses will never be able to tell us what the future holds. In the end, what matters is the quality of our decisions in the face of uncertainty. --Peter L. Bernstein
You can get into a lot of "how many angels can dance on the head of a pin" arguments about this, but I don't want to get into any of them, mostly because they don't matter. What does matter is that (a) the hammer -- or a hammer-like candle -- forms in the first place. That alone tells you something. What matters further is (b) HOW it forms. The jargon is completely irrelevant. What matters is that price was at one point, plunged, then recovered dramatically to get back at, near, or even higher than it was in the first place. How far it gets and where it ends up (below the open, at the open, above the open) tells you something about demand. How far price dropped before it was driven back also tells you something about the players and how passionate they are. WHERE price bounced is also important, which is where support and resistance come in. Therefore, to say that if price makes it back higher than the midpoint of the candle, it's a hammer, and if it doesn't, it's not, is beside the point. Or to say that it has to get back within a certain percentage of the high. Or that there can't be an upper tail. Etc. Etc. What is the point is that you're being told a story about a struggle. The story is continuous, even though you may segment it with bar intervals and timeframes. Your task is to learn the language in which the story is being told, which is largely the language of greed and fear. If you imagine the effort that it takes on both sides to create that hammer, you'll have a better idea of what to do with it.
Trading with confidence has to do with having a method which you have proved yourself, and which you know will win over time if you follow it consistently. That means being able to recognize the conditions which allow you to trade, and only trading when they are all present. This is comparatively easy with hindsight: when we're actually there, we can see when all the pieces fit. But beforehand, we don't know that all the pieces are going to fit: so we trade because we're impatient and fear that this maybe is the best we'll get. Well, somehow we just have to get to be patient. Let's face it, it calls for great discipline. --John Percival