TRADABLE BASES

Accumulation bases can be found in various shapes and sizes. The most common recognizable one is the one where the stock moves sideways in a narrow range and the volume has dried up.. However we will also find rectangular bases where the stock moves up and down but restricted within a wider range. You will find weakness coming in at the top of the range and strength at the bottom of the range.

Many of the ranges are easily tradable. For a trader or investor with longer term view the idle time to get in would be when the stock bounces back from the support line. This way it the stock breakout he would have the idle entry point. He also has the option to quit at the stock fails to cross the resistance at the range top, For a short term trader who is adapt in trading the long and short this kind of base provides good opportunities to go long at the support line and go short at the top of the range.

Just like the Trend channels described before we can find a zone in the middle of the range which I call the conflict zone where many reactions take place.

Here is just an example of tradable base. More tradable bases will be Posted later.

TREND CHANNELS

Next I will touch on the concept of trend channels. Tom Williams briefly mentions this in his book. He calls then Trading Ranges though I prefer the term Trend channels as in we will find the stock is actually trending up or down when we look at from a wider view. This is actually different form the horizontal trading ranges where the stock movement is sideways. Of course I have taken some deviation from his concepts.

Many times you will find a stock moving in a upward or downward channel. We can draw upper trend lines and lower trend lines and they would almost be parallel. Tom Williams divides this channel into upper quarter and lower quarter and most reactions happen in these quarter. He also calls area above the upper trend line( or supply line) as over bought zone and the area below the lower trend line as over sold zone. The middle area is where we can expect the stock to move anywhere.

But I go a step further and I draw a middle line. The interesting observation here is that it is around this middle or mean line where most we see a conflict or tug of war between the bulls and bears happen and many reactions happen around this line. I call this the “Conflict Zone”.

From a VSA perspective we will find support or strength coming near the bottom trend line. We will also see weakness creeping in in terms of upthurst bars or pseudo upthrust bars near the upper trend line. In most cases the Trend channel is wide enough to give some nice trade opportunities.

Here is n example of downward trend channel

Reversal and Retracement

Reversal and Retracement

One of the difficulties we face when analyze prices is determining whether the stock is going through a reversal or just a retracement. If we assume that a retracement is in progress and it turns out to be a reversal we end up giving away too much. At the same time if we assume a reversal then we would be out of the trade too soon. These apply specially for positional traders.

So how do we get a clue whether it is retracement or a reversal? Following are the basic things one should look at.

RETRACEMENT

1. Lack of volatility
2. Small spreads
3. Decreased Volume

REVERSAL

1. Increased Volatility
2. Large spreads. Especially Effort to Fall bars.
3. Increasing volume.

[ Just enclosing an example ]




The simplest thing we can do is to draw arrows for the stock movement and the volume. In retracements you will the arrows are in the same direction. And in case of reversal the arrows will be in opposite directions.

TREND LINES

we are going to look at trend lines. We all use Trend lines and trend line breaks to decide reversals. We will look at trend lines with respect to VSA.

The general belief in TA is that Trend lines offer support in up trends and also act as resistances in downtrends. We will not go into the details of why and how of this belief. Instead we will look at the how volume and spread can give us clues whether the trend line will hold or break.

For example we will take an uptrend. When the stock retracts towards the trend line, small spreads and lower volume indicate as the stock approaches the trend line indicates that the stock is likely to be supported by trend line. Higher volumes and wide spread indicate a probability of a trend line break. Trend lines are resistance areas and effort is needed to break the trend lines. Wide spreads and high volumes are indications of this effort.

Many times we will see the SM absorbing the supply near trend lines. This is a bullish indication as the smart money is bullish on the stock and is interested in higher prices. So when there is lot of supply near trend lines they absorb the supply to keep the prices above the trend line.




A) We can see that the volume is decreasing and the spreads are narrower as the prices retrace towards the trend line.

B) Here the volume is increasing as the prices approach the trend line. This would suggest increased probability of a Trend line break.

C) We have a bar with increased volume and closing near the low. This bar indicates that there is increased supply. The next bar is an effort to Rise bar. This would mean that the SM is interested to keep up the price and they have absorbed the supply on the previous day. Entry / Adds on such effort to rise bars near trend line often result in a good trade.

D) Here the volume is simply tapered off. There seems to general lack of interest on all sides. (This are area shows a failed test and no demand bars indicating a general weakness). However volume came in near the trend line and stock is again going up towards the right edge.

SUPPORT & RESISTANCE

Before we proceed with Support and Resistances with regards to VSA let us look at some basics about support and resistances.

The general practice followed by most of us is to draw lines from previous swing Highs and Lows (or high and low pivots). Once these lines are they are taken as Support and Resistance lines .. I repeat….LINES… IMHO this is one of the basic folly we make… The question we ask here is “How can a single price act as a Support or Resistance Line ?” It is like assuming that in case of resistances there are a huge numbers of people holding the stocks at this particular price and early waiting sell.

A more reasonable assumption would be that there are many holding the price at and around last swing high. So there would be a area or a zone of supply/Demand rather than a single price. In case if the last swing high was an Upthrust bar the whole range off the bar could become a supply rich area.

The point here is that not all swing Highs and Swing Lows offer Resistance / Support.
A swing high can be considered as a resistance only if the price reacts at that level. Till then a swing high remains a swing high. Same is the case for the Supports. Swing lows become swing lows only if the price reacts at these levels



An important thing to note here is that the Resistance areas do not represent large supply waiting to be dumped. In the same way the Support areas do not represent a huge demand waiting to lap up all the supply coming in.

It is better to consider the resistance areas are zones where selling pressure increase and support areas represent zones where buying pressure increases.

Now the question is what Resistance and support has to do with VSA? As mentioned earlier the SM generally give due respect to the Resistance and Support areas as they represent zones of Selling pressure and Buying pressure.

In general increased volume with increased spread as the stock approaches a resistance area is a bullish sign. Falling volume and decreased spread would mean that stock would be stalled at these areas.

In the same way decreased volume and spread as the stock approaches support area is sign that the stock would take support in that area and reverse. Increased volume and spread would indicate that chances of the stock breaking the support are more.

If Resistance areas are crossed with high volume it is a sign of bullishness and if the crossing is with low volumes caution is advice. In the same way if supports are broken with high volume it is a sign of bearishness and low volume crossing should be viewed with caution. Going short on a low volume break of support could result in a bad trade.

The SM often attempt to push through the Resistance areas with a huge volume. These are clearly evident on the charts in terms of high volume wide range bars.

In general it always pays attention to resistance zone even if you are using you own trading systems. When “Buy’ signals are generated near resistance zones one has to be careful.


It is widely believed that SM respects the support and resistance areas.

NO SUPPLY BAR

“No Supply”.
As the name signifies this bar indicates absence of supply and indicates strength.

The No Supply bar is a narrow range low volume down bar closing in the lower half. The No Supply bars are found in the early Bottom reversals and indicate strength. It is also common to find these bars in an up trend which are indications of continuation of the trend. They would also be found on consolidation bases.

A No Supply indication has to be read in context with background. At bottom reversal areas they indicate there is no supply available. Then the SM gets ready for mark up. Hence they indicate strength especially if they appear before/after test bars.

During up moves a No supply could indicate non participation from SM. IMHO this is one of the difficult indication to interpret.

Reverse Upthrus

Reverse Upthrust.
Users of TG will not find this in their software. However I do find it a useful indication.
Just like the Upthrust bar we will find in a bearish move a High volume wide range up bar with the low chartering into new lows and the closing will be near the high. This is a good sign of strength returning and you find the trend reversing almost immediately.

The reverse Upthrust is rare and is found rarely at bottoms. Finding the bottom is more difficult than finding the Tops. Most of the time the bottoms will see stopping volumes, some sideways moves and multiple tests before we see a reversal of the trend. It is also common to see consolidation bases at the bottoms.