Swing Prices Volume and Ord Volume

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Moving on, let -5 compare Ord-Volume analysis to swing price and volume analysis, this time using the example of Novamerican Steel, Inc. (TONS). We covered Ord-Volume analysis of TONS in Chapter 3 (see Figure 3.16), but let -a look again in light of swing price and volume relationships to the Ord-Volume method. My goal is to show that volume analysis does give important information of what to expect in the price action of an issue.

FIGURE 5.7 Candlestick Chart of Novamerican Steel (TONS) Shows that Volume Is Declining as Rally Continues, Indicating a Top Is Near Source: Chart courtesy of DecisionPoint.com.

In Figure 5.7 , which is a candlestick chart of TONS, we can see a decline in volume as the rally continued, indicating that a top was approaching. Observation of the volume in TONS could have helped to identify the approaching top near $90. Notice in this figure how from January to late February 2005, volume gradually decreased as TONS rallied. This demonstrated that upside energy was subsiding. With the reduction in "fuel" to push the market higher, this stock was doomed to reverse.

It is much easier to see the volume contraction and determine the leg volume relationship when using the OrdiVolume format. With a trained eye, traders can use this format to make general estimates in volume comparisons. In Figure 5.8, TONS is displayed in a monthly format to depict more clearly the significant decrease in volume (energy) in February 2005 as TONS rallied to the $90 high. After the high at the $90 level, notice the

FIGURE 5.8 Ord-Volume Chart Shows Significant Reduction in Volume as Novamerican Steel TONS Approaches the Top in February 2005 Source: Chart courtesy of DecisionPoint.com.

large increase in volume in March as the stock traded lower, which confirmed the top and showed energy had switched to the downside.

Figure 5.9 shows TONS in the same time frame but from a different perspective, using the swing price and volume relationship to trigger a sell signal. (This setup was discussed in Chapter 4, Figure 4.20, as a "False Breakout.") The signature of this pattern is when an issue breaks to a new high and volume shrinks by 10 percent or more compared to that of the previous high. This condition shows energy is lacking on the breakout to the upside, and at some point the market will reverse back to the downside. The sell signal is triggered on the close below the previous high.

The monthly chart of TONS in Figure 5.9 indicates (see solid line on chart) that a close below the $75 level will trigger a sell signal. This sell setup would be nearly impossible to see on a daily chart; however, in a monthly chart it shows very clearly. My point is that if daily charts do not show any setups then switch to a weekly or monthly time frame—and sometimes a signal will jump out at you.

FIGURE 5.9 Ord-Volume Chart for TONS Shows "False Breakout" Rule and the Triggering of a Sell Signal with a Close below Previous High Source: Chart courtesy of DecisionPoint.com.

Now let's take a look at TONS again in the Ord-Volume format in the same time frame in Figure 5.10. (We saw this view in Chapter 3 , Figure 3.16. ) Right away, you can see there is a problem going into the high at $90.27 because volume was 110,000 shares (0.11 m)—or 60 percent less than the Ord-Volume (average daily volume) of the previous up leg of 270,000 (0.27 m). As previously stated, when Ord-Volume shrinks by 50 percent or more compared to the previous up leg or down leg, then a reversal in the market is about to occur. A close below the previous high (in this case a close below $74.85) triggers the sell signal.

Now notice the Ord-Volume for the down leg after the high at $90.27, which is double at 220,000 shares (0.22 m) compared to the previous up leg. This confirms the top. Although the sell signals triggered for TONS by Ord-Volume and swing price and volume methods came in at the same levels, both methods used volume in different ways to achieve the same outcome. Both methods looked for decreased energy as the market broke out—one

FIGURE 5.10 Ord-Volume Analysis of Novamerican Steel (TONS) Shows 60 Percent Decline in Volume in Up Leg to High at $90.27, Indicating a Market Reversal Is Near

method by price swings and volume analysis and the other by leg volume analysis.

The sell signal setup using swing price and volume analysis on a daily chart for TONS was nearly impossible to identify, although it become clearer when the view was switched to a monthly chart. In the monthly time frame, the Ord-Volume method sell signal setup was immediately visible. Both sell signals were successful, but the swing price and volume method took a little more research to identify.

Let's examine another stock that we have already looked at using Ord-Volume analysis: 8X8 Inc. (EGHT). (See Chapter 3, Figure 3.24.) To refresh, Figure 5.11 shows the bullish setup going into the low at $1.32 in August 2004, with volume of 290,000 shares (0.29m). Ord-Volume on the down leg to the $1.32 low was nearly 50 percent less than the Ord-Volume for the previous up leg of 570,000 (0.57m) as well as the Ord-Volume for the previous down leg of 680,000 (0.68m). This shrinkage in Ord-Volume

Ord-Volume expands over 300% on up leg compared to previous down leg and shows energy has switched to up and

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Ord-Volume expands over 300% on up leg compared to previous down leg and shows energy has switched to up and

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FIGURE 5.11 Ord-Volume Analysis for 8 x 8 Inc. (EGHT) Shows 50 Percent Decline in Ord-Volume on Down Leg Going into Low at $1.32, Setting Up a Bullish Condition mk

FIGURE 5.11 Ord-Volume Analysis for 8 x 8 Inc. (EGHT) Shows 50 Percent Decline in Ord-Volume on Down Leg Going into Low at $1.32, Setting Up a Bullish Condition as the market hit new lows shows the down force was very weak, indicating a bullish condition was developing.

As Figure 5.11 shows, a buy signal is triggered on a close above the previous low of $1.58. Furthermore, the buy signal is confirmed by an expansion in Ord-Volume of over 300 percent on the up leg after the buy signal. This is pretty straightforward, with nothing left to the imagination. Still, let's look at EGHT using swing price and volume analysis to see if an additional confirmation could be found using this method.

Figure 5.12 is a candlestick chart of EGHT, marking the swing low from July 19, 2004, with lines drawn from that low as well as from the volume close. Then, as EGHT breaks the July 19 low, volume does not contract to a significant degree, which would have suggested that energy to the downside had dissipated—although not significantly, which would leave the trader with uncertainty.

As Figure 5.12 shows, EGHT did work lower and volume also picked up somewhat at the price lows. Therefore, using the swing price and volume method on a daily chart of EGHT alone, mostly likely a trade would not have been taken at the price low. However, look at what happens after EGHT comes off its low in mid-August 2004: Volume picks up substantially as the stock hits the previous high from late July. The higher volume

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FIGURE 5.12 Candlestick Chart of 8 X 8 (EGHT) Shows Volume Does Not Decline Significantly after a Low Is Put in on July 19, 2004, Creating Uncertainty Source: Chart courtesy of DecisionPoint.com.

on this upward move created a bullish "High Volume Retest." At this point, the scenario for this stock would be viewed as bullish and the outlook would be for it to move higher. Further, a gap formed nearly $1.90, which would have prompted a trader to initiate a long position near the gap level using the "Gap Test" rule as outlined in Chapter 4.

The important lesson here, though, is that the swing price and volume analysis method using a daily chart for EGHT would not have gotten the trader into the market with a long position near the price low, although it did confirm the bullish upswing after the price low.

Let's take another look at EGHT, this time using a weekly time frame and the swing price and volume method. In Figure 5.13 ' the weekly time frame for EGHT reveals a different conclusion using the swing price and volume analysis near the price low, compared to the daily chart. Using a weekly time frame, we can see that after the July 19 low, volume does contract as the stock works lower, which is a bullish setup. Further, a close above the previous swing low triggers a bullish signal.

FIGURE 5.13 Weekly Chart of 8 X 8 (EGHT) Shows Volume Contracting after the July 19 Low, Indicating a Bullish Scenario Source: Chart courtesy of DecisionPoint.com.


The lesson here is to use different time frames to view an issue. When the longer-term time frames reveal an overall trend, then you can put the "wind at your back" as you trade the smaller time frames. This means that if the longer-term time frame reveals a bullish tone in a stock, then you will look for a trade setup in the shorter time frames to buy that stock and go long. This time frame comparison also holds true for signals that are generated on a daily and weekly basis.

As we've seen in these examples, a signal will have more importance on a weekly chart than a daily chart. Remember, the longer time frames rule the shorter ones. To review this time frame relationship using Figure 5.13 - we can see that the swing low occurred in the third week of July

2004 at the $1.58 level. A couple of weeks later the market worked lower and broke the weekly low of $1.58 on reduced volume; this created a "False Breakout Bottom" (Chapter 4, Figure 4.22). To confirm the downtrend, volume should have matched or exceeded that of the previous low. (As you recall, Wyckoff called this confirmation of breaking to new lows "Falling through the Ice.") To get through the previous low, energy (volume) must be at least equal to or higher than the previous down leg.

However, as a stock breaks to a new low if the volume is at least 10 percent less, then the whole scenario changes to a bullish tone—which is the case of the weekly break to new lows in EGHT. The stock closed above the swing low of $1.58 in the fourth week of August, triggering a buy signal.

Now, with the weekly setup identified and confirmed, traders would have switched back to a daily chart to purchase EGHT where they felt most comfortable following a daily close above $1.58. If a trader waited for the close on a weekly time frame, the purchase price would have been near $1.90. On a daily basis, the $1.58 swing low was exceeded on August 23, 2004, with a recorded high that day of $1.76. Trading with a daily chart, therefore, a trader's entry point would not have exceeded $1.76 on that buy signal. (In other words, using a daily chart for a specific entry point for a long trade, the entry would have been no higher than $1.76, compared with $1.90 for the weekly chart.)

A couple of points should be emphasized here for clarity. Let's assume that the swing price and volume analysis gave a weekly time frame buy signal, but did not generate a buy signal on a daily time frame. Since the weekly time frame would rule over the daily, a trader would have taken the weekly buy signal. However, if the daily time frame had triggered a buy signal, but the weekly time frame did not, then a trader would have less confidence in that daily buy signal. If trader did take the daily buy signal, and the weekly time frame did not turn bullish, then it would be more of a "scalp trade" for a short-term, small profit, instead of a bigger potential "shooting for the moon" long-term trade.

In order to "shoot for the moon" for a bigger profit potential, a trader needs the weekly chart with its longer-term time frame to be in favor as well.


In Chapters 3, 4, and 5, I have explained how volume can be used in swing trades as well as in leg trades to trigger buy and sell signals. It may take traders a bit of time to wrap their minds around the new concepts about volume (energy); however, I believe they will discover—just as I have— that the volume concepts presented in this book will be a valuable tool to use in the stock market.

My hope is that traders feel increased confidence with this knowledge of volume analysis to help them identify strengths and weakness in stocks, helping them to attain their financial goals more quickly and with greater assurance.


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