STOPPING Volume

The next VSA indication we will discuss is called the Stopping volume, also called absorption volume.

Normally in a down trend you will see a down bar with high volume bar closing on the upper side. This is called a Stopping volume. This indicates that the SM is absorbing all the stocks. The SM has decided to start the game all over again and have decided to stop the down tide and start accumulating. As a result the stock will soon see side ways movement or go into a long accumulation phase. In effect the stopping volume or absorption volume indicates that the long bearish move is likely to end soon.

An Ideal Stopping Volume bar will be down bar with high volume and closing near the top. However most of times you would see the close on the upper half of the bar.

Stopping volume occurs after long down trend. Stopping volumes are basically alert to the impending reversal.

Effort without Result

Indication of strength. One of the most powerful indication of strength is the “Testing for Supply”.

After down trend when the SM has accumulated enough and is ready to move the stock up again they test if there is still supply present. Also in an uptrend if the SM encounters large supply they would pause till the supply disappears. Then they would check again to see supply is present.

The Testing for supply is done by rapidly marking down the price. If the stock recovers towards the high and the volume is low it would mean that there was no supply. If the volume is high and if the stock fails to recover it would mean that there still supply present. Low volume or less trading activity indicates a successful test.

A TEST bar typically dips into a previous high volume area and recovers to close near the high on low volume.

A test bar viewed in isolation does not signify anything. It necessary to look at the background to ascertain the strength of the Test bar. If there has been absorption volumes just before the Teat bar the strength of the test bar becomes more significant.

weakness

Let us look at another indication of weakness. If the stock has been moving up on a high volume and then we encounter a down bar closing down towards low on high volume is a sign of weakness. Volume need not be very high. Ideally the volume should be higher than the previous two bars.

If you look at the enclosed chart the stock was moving up on higher volume. Then we have the down bar closing down near the low. The volume is higher than the previous two bars. Looks like the SM have been distributing. The next bar looks more like a test for supply. The volume is low and the stock closing up. The low volume indicates supply is lower. Then again a downbar on higher volume. The weakness is more pronounced now. What followed is obvious…

What to do when we see an Upthrust”.

We looked at the Upthrust and Pseudo Upthrsts.. We also looked at what to look for in an Upthrust Bar.

The obvious next question would be “What to do when we see an Upthrust”.

The next bar after the UPthrust is very important. That helps us decide our action.

If the next bar is a Downbar closing down it is clear that the weakness and set in and the immediate trend is reversing. Here again the volume is an important indication. If the volume is high then it time to get out and wait to short. If the volume is low the weakness is not so pronounce and it may be worthwhile to wait and watch next bar movement. Here the spread and the position of Bar also give clues. If the Bar is wide closing down the weakness is more pronounced. Also if the high of the bar is towards the low of the Upthrust bar the weakness is enhanced.

If the down bar is with low volume and closing Up then the weakness of the upthrust bar is still in question. We have to wait for the enxt bar for confirmation.

If the Bar after the Upthrust bar is an Upbar closing up then it would mean that the weakness projected by the upthrust is negated

Pseudo Upthrusts

The Answers for the above would decide how potent the Upthrust is.

High volume Upthrust are a sure indication of weakness, higher the Volume the stronger the indication. It may be even wise to get out of the stock if the Upthrust has ultra high volume.

Wider the spread more potent the Upthrust

Lower the closer the stronger the indication of weakness. Ideally it should close should be the Low. If the close is towards the middle it would mean than the SM was not successful in marking the price down. There was too much demand.

An ideal Upthrust will move into new territory. The High will be very much higher than the high of the previous bar. This means the SM was really successful in marking the price up and many traders get trapped into bad positions in the end of the day.

Upthrusts are effective when the trend has been in force for some time. Sometime you would find weak up thrusts in early trends.

Many times you will Upthrusts with low volume. I call them Pseudo Upthrusts. These are not effective as the Upthrust. But are still signs of weakness..

What is an UPTHRUST BAR ?

What is an UPTHRUST BAR ?

An Upthrust Bar is a wide range bar, with a high volume and closing down. It indicates that the prices were marked up during the day (for simplicity we use day, it is equally applicable on all time frames), the Trading activity was High as indicated by the High volume and the prices dropped to near the low (or to the low) towards the closing hours.

Looking the SM perspective what happened was that the SM marked up the prices in early trading hours indicating strong bullishness. Enticed by this bullish move the weak money also rushed to acquire the stock. Shorts if any would also have rushed for cover. Meanwhile the SM is quietly distributing their holding to the weak money. In the later part of the day the SM drastically marks the price down trapping the weak money holding stocks at much higher prices.

In order to make this ideal, the Upthrust normally appears after a wide range upbar with high volume. This makes it easy for the SM to markup the price and entice the weak money. Most of the time the Upthrust will be moving into new higher territory. The High of this bar will be much higher than the previous high.. High volume should be an important consideration.

What are the Things to Look for in a Uptrust?

1. High Volume and How high?
2. Wide Spread?
3. Close, near or on the Low?
4. What was the previous bar action?
5. Did the bar into new territory?
6. Is the stock in an up trend?

Mark Down

the “Mark Down”. When the SM has disposed off most of the accumulated stock they start the most dramatic move of crashing down the prices. Suddenly supply comes in plenty overwhelming the demand. The price starts tumbling. The spreads dramatically widen. There is panic selling from investors. But the prices drop so rapidly and most of the investors and green horns that entered late never get a chance to off load there holdings.

Like the markup phase we will see some rallies in the downtrend. These are more off reactions. Either the SM themselves try to shore up the price for their last bit of holding. Day traders, “Value Investors” trying to bottom pick and the green horns trying to “Average” contribute to these rallies. Our friend Saints calls averaging “Catching a dropping knife”. I cannot find a better description for “Averaging”. It is better to note the volume during the rallies. You will find the volume is more on down days and less on up days. When the rally fails the average investor panic and start selling and that accelerates the fall.

It may take weeks for the down trend to reach the bottom. The end is generally indicated by a stopping volume or an absorption volume. The SM may be absorbing the stocks to start the game again. You would find a High volume bar with long spread and closing near the top.

It is during the mark down phase you will see rallies like the “Dead Cat Bounce”. Pay attention to the volume pattern during these rallies.

The mark down phase is the most depressing and cruel part of the SM game plan. By the end of it the SM would be taking delivery of his brand new E class Benz while the average investor is scouting for a buyer for his run down maruti.
Of course the Markdown phase does offer good opportunities to smart investors who are adept in short side trades.

But the mark down phase has a silver lining… towards the end it offers the smart investors many opportunity to enter into some really profitable trades. We will discuss all these later

Distribution

Distribution is the process where the SM is offloading their accumulated stock at a much higher price.

It is not very easy to spot distribution. Many a times you will not see any congestion areas. The UP move may slowly deteriorate and start rapidly deciding after a furl of heightened activity. The Wyckoff puritans may disagree here.

In mark up phase after the stock has run up for some time you will the volume diminishing and the spreads narrowing. The angle of ascent becomes lesser and lesser. The stock trend may even flatten. This would mean that the demand is drying up. The buyers are not willing to pay a higher price for the stock. Also sellers are reluctant to offload their positions hoping and waiting for a better price. It is here the SM slowly start offloading their stock. Much care is taken not to make it visible. Volume is never too high. Prices are support at certain levels so that there is no panic. Here it is important to take note of the volume price pattern and angle of ascent. Too steep an ascent is also a problem. Suddenly you will see the stock dropping down like stone from its high perch.

It is at the top you will see patterns like H&S and double Tops which are distribution patterns.

Many times it is hard to maintain any semblance of the uptrend continuing and so a sideways congestion move ensues. The congestion zone will be quite similar to the zone we discussed earlier for accumulation. You will see the price being supported at some support level and being contained within a resistance level. The points to take note are the same ones we talked about in the accumulation zone. Just like in the shake outs in the accumulation zone you will see a shakeout in terms of up thrust bars. One has to be very careful trading the breakout from the distribution zone. If it turns out to be the final climax move you will be left holding the bag. But then the stock may goes for another up move. Here looking for uptrusts and other weak indication becomes necessary. We will be talking about these indications later.

In the final climax run the stock explodes in terms of volume and price. Like I said before the breakout traders , greenhorns rush in and the shorts will run for cover. Then you will see many Uptrust Bars where distribution takes place with maximum prices. There could be a series of Uptrusts and then…….BANG….. the stock drops down like a stone.

The chart posted earlier shows an example distribution zone and the climax run. The upthrust bars are identified with square on Top of the bar.

“Mark Up”.

The game plan of SM, namely “Mark Up”.

Once the smart money has a cornered a huge chunk of the stocks they are ready for the next move. The idea is to jack up the prices so the SM can fill their pockets. Typically you will see the low are getting higher. The closes are slowly getting nearer to the high. The prices are getting higher on lower volumes as there is very less supply. The reactions happen much higher than the support line.

Then ..the stock shoots through the resistance or supply line with higher volume. For that matter the stock need not exhibit the characteristics mentioned above. Suddenly it can just pop out of the congestion zone.

It is better to take note on the volume at this juncture. The volume need not be very high at all. Since there is no supply (SM have the majority of the floating stock). If the volume is moderate we should see it coming in strongly soon. Otherwise the move will collapse and stock would return to the base. We should see a large swift increase in the volume in case of a genuine breakout. The stock should be closing near the top. Also too much volume is not good. It would mean too much supply is coming in. Heavy volume with the stock closing in lower half would definitely mean supply coming in. Typically an 150% increase in volume with the close near the top would indicate a successful breakout.

The breakout is just the beginning. Then the stock moves up in stages. Each stage would be an advance at higher volumes and a retracement at lower volumes. The retracement is mainly due to short term traders booking their profits. The SM also starts the distribution during the retracement. The point at which the retracement stops become important. These should be above the previous retracement stops. In simple terms as Saint would put it the stock is making higher high pivots and higher low points.

We will also see sideways movement during the up move which would be congestion areas. We need to pay lot of attention to these congestion areas for this could be final distribution areas before the mark down begins. Also it pays to give attention to volume during retracement and congestion areas. Increasing volumes near support line and low pivots indicate problem. If the increase is dramatic then it is time to re-evaluate your position.

Finally the stock could make a climax run where the price and volume explode. The shorts run for cover and the green horns rush in not to be left out... like cattle rushing into a abattoir. Soon rapid markdown starts leaving the weak money holding the bag and he SM their cash.

Please do note that here we are talking about more of an idealistic picture. In reality it could be more complex and many a time difficult to decipher. But then practice makes one perfect.

How one checks if the congestion area is really an accumulation area

How one checks if the congestion area is really an accumulation area.


There are a few things to lookout for..

First, the indecision should be quite visible. In other words the volume should be low and quite. No huge volume upsurges. Even if the volume is relatively higher the range between up day volumes and down day volume should be narrow.

Second, the spread of the bars (High – Low) should be narrow.

Third, the volume should shrink near the support line and expand near the resistance line.

Fourth, the stock should be trading in a range for some weeks if not months.

Also you may see some shakeouts in the trading range. The SM would temporarily drive down the prices below the support line in order to takeout the stop losses and panic the weak hands into selling. You will see the stock bounces back above the support line immediately. By this process the SM is shaking out the weak money from the stock. For most of us it is just a failed breakout. Sometime the stock instead of bouncing back would continue to drop if there was too much supply. So trading these breakouts could be tricky.

Also it would a good sign if the stocks trading range is much above the support line.

Normally we would see some of the above signs if not all in the acuumulation area.

There are many other patterns which signify accumulation. Some of them are rounding bottoms, reverse head and shoulder and double bottoms (or “W”) patterns. Each could be explained in terms of SM activity. However we would go into the details now. One thing to keep in mind when evaluating patterns is that it is very important to check the volume pattern as well.

For an example we will look at the chart of HCC where a clear accumulation indication was seen June 2007...