Article Reviews, Thoughts, Trading

Volume Analysis and Thoughts on Tape Reading

Saw an article on Volume Analysis posted on T2W. It has some good points and also gives me an opportunity to jot down my thoughts on tape reading. These are by no means definitive, so feel free to post any comments if you think that they are not correct. Some key points:

  • Institutions mark up prices to draw in buyers so that they can unload their positions to these buyers.
  • Up bars with excessive volume are a sign of weakness.
  • Down bars with high volume are a sign of strength.
  • Low volume up bars signify no demand, and signals to the large operators that buying has dried up and mark-down can begin.
  • Low volume down bars signals to the large operators that prices have been marked down enough and it is time to cover.
  • Low volume down bars with a narrow spread (i.e. high – low) occurring near an old low means professional operators are bullish and are absorbing the supply.
  • Low volume up bars with narrow spread occurring near an old high indicates that the market is weak and the demand is being met with ample supply.
  • Wide spread on increased volume approaching a trendline means the trendline is likely to be broken.

Rising Prices: Differentiating between Real Demand and No Demand

The article wrote that “Rising prices create demand, demand does not create rising prices”. That I do not agree. IMO, rising prices create demand, and demand also creates rising prices. It is essentially this self-reinforcing loop that leads to herd behaviour and manias. Since rising prices can be a result of mark ups, or a result of real demand, how then to tell the difference? This is where volume comes in. Rising share prices coupled with increasing volume would generally correspond with real demand, while rising share prices with low volume generally means prices are being pushed up with no real interest from buyers. Techniques of Tape Reading by Vadym Graifer wrote that rising share prices with low volume can also be due to buyers quietly accumulating. That can be true but it would have to depend on the context. If it is a stock not under any spotlight (e.g. little known company with no news), that can indeed be the case. However if it is a well-known stock or has already attracted attention, there is no such thing as “quietly” accumulating when the spotlight is already shining on it.

Interpreting Volume

So in the above paragraph, we just mentioned that rising prices with high volume is bullish. Why then does the article write that up bars with high volume are a sign of weakness? If you think about it, there are three situations that would result in up bars with high volume.

  1. Situation #1: There is strong, real demand that takes out the Ask prices without meeting much resistance, with more demand coming in the near-term. This is bullish.
  2. Situation #2: There is real demand that is taking out the Ask prices but the demand is a final push and has finally exhausted, with little demand coming in the near-term. This is bearish.
  3. Situation #3: There is a large amount of supply that absorbs the demand and essentially caps the price at a resistance level. This is bearish.

In all situations, the daily bar that results can be an up bar with high volume. How do you tell the difference? Well the obvious way is to go one level deeper, to look at the intraday data. That will allow you to distinguish between Situation #3 vs. (Situation #1 or Situation #2). If the intraday data is still not sufficient to tell the difference, a deeper look into the time & sales may be required (e.g. are trades transacted at the bid or ask? did the bid-ask move?). Is there a way then to distinguish between Situation #1 and Situation #2? This is when looking at only 1 single bar is insufficient. You would need to look at the flow across the time frame. If the stock continues to perform well, it was a Situation #1, else if it performed badly, it was a Situation #2. Looking at the whole flow also gives us an advantage in terms of quickly identifying a Situation #3 without going one level deeper. Generally a single up bar with a volume spike (i.e. low volume on both sides) corresponds to Situation #3. Rising stock prices with increasing volume generally corresponds to Situation #1 at the start, and Situation #2 or #3 at the end of the move.

Handling High Volume Situations

If you are still reading, you would probably be thinking that if we only know whether it was a Situation #1 vs a Situation #2 after the fact, that information is completely useless. In a sense that is true if you are looking to predict the next bar. However if you trade not by predicting moves but by taking positions as the market tells you to, then you would be fine. Simply raise your stop-loss. If it was a Situation #1, the stock continues its strong upward momentum and you are be fine. If it was a Situation #2, you get stopped out earlier and you would be fine too. Simply put, look out for high volume, and take the same action, don’t be caught up trying to interpret every single bar that you see.



One thought on “Volume Analysis and Thoughts on Tape Reading

  1. Sebastian Manby was mentored by Tom Williams who refined Volume Spread Analysis based on Wyckoff’s tape reading. Both Tom and Sebastian take into account as criteria: the volume, the spread and where the relative close is on bars and overall the context of what is happening in the background.

    If you read TW’s writings he fully describes how weakness appears on up bars and it can be recognised by taking in all of the above criteria.

    You are also right high volume on upbars can reflect demand but it is not an all or nothing outcome solely dependent on looking at volume alone; all the criteria should be considered to distinguish signs of strength or signs of weakness,


    Posted by cmacdon | March 2, 2014, 11:08 pm

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