The Volume Wave Reveals Price Directional Secrets
We all know stock price action moves in a wave like formation. Much attention is given to price waves by many technical studies (none more so than Elliot Wave), yet many fail to apply equal attention to the volume per each wave.
We use our very own RTT VolumeWave indicator to reveal the secrets of price action relative to volume action per wave. RTT VolumeWave primary function is to assist with Richard Wyckoff three laws of chart reading.
Quick reminder ...
The Law of Supply and Demand
When there is an excess amount of something (supply) the value of that item is reduced to draw in the demand needed to absorb that supply. Or, if there is a scarcity of something, then the value of that item will increase to create the supply that will meet that demand.
The Law of Cause and Effect
In order for there to be an effect (change in price), there needs to be a cause. The effect will be in direct proportion to that cause. Best price moves occur when there has been enough time to allow for a period of accumulation or distribution (or in other words a cause).
The Law of Effort vs Results
Simply state, if there is an effort, the result must be in proportion to that effort and can not be separated from it. If it is not, it is an indication of other principles in action. Think of effort as the volume on a move, and the result is the corresponding price action. These two should be in harmony. If you have a lot of volume, you should see a lot of move, if you don't...why? What is happening? This is where we become the detective, use our tools, evaluate that price action (result), with the corresponding volume (effort), and make some deductions based on the "balance of probabilities".
As far as we know Richard Wyckoff in the 1930s did not use this type of indicator, then again he didn't use computers either. But two of the modern day successful students do. Tim Ord in his book 'The Secret Science of Price and Volume' explains how to review volume per price wave and when to be bullish or bearish. David Weis the co author of 'Charting the Stock Market, The Wyckoff Method' uses an indicator he calls the 'Weis Wave' which is a mirror of our RTT VolumeWave.
The RTTVolumeWave secondary function is to help to apply the physics law of force and motion within stock prices. (Which in our view, is the basis of Wyckoff's three laws).
If there is force there should be a motion:
a) If there is high volume and price move is good then this is equal force to equal motion: If bullish then this means buyers out number sellers and prices are being marked up. If bearish then this means sellers out number buyers and prices are being marked down. In both cases while there is good volume supporting the direction of the move the price move can be expected to continue.
b) If there is low volume and price move is poor then this is equal force to equal motion: If bullish then this means there is no demand, if bearish this means there is no supply. In both cases a price move is in a temporary flux awaiting force to show its hand in either direction.
c) If there is high volume and price move is poor then this unequal force to motion: If bullish then this means buyers may not out number sellers and prices may be marked up poorly or move sideways as the mark up process has been hindered by distribution. If bearish then this means sellers may not out number buyers and prices may be marked down poorly or move sideways as the mark down process has been hindered by accumulation. In both cases the price move is subject to expected reversal.
d) If there is low volume and price move is good then this unequal force to motion: If bullish then this means buyers out number sellers while prices are being marked up, but the level of buying interest is poor or without conviction. If bearish then this means sellers out number buyers while prices are being marked down, but the level of selling interest is poor or without conviction. In both cases the price move is subject to expected reversal.
Best by example: Weekly Ford Chart (F). The numbers refer to notations on the chart.
Note1: When comparisons are made is done on a relative basis to most recent
Note2: We use Richard Wyckoff phase terminology when required.
1) Very bullish mark up phase, both rising volume and rising prices are significant.
2) Minor sell off, still very bullish as sell off volume is not significant.
3) Two advances, the first is not very bullish and ends up being a minor basing re accumulation period (automatic rally), the second is bullish mark up phase, however volume support is less than significant and will prove to be bearish. Notice in the second rally multiple bullish springs. This rally ends with a buying climax.
4) As suspected from (3), a distribution pattern occurs. However it has high volume and prices do not depreciate much at all and very little price technical damage is done to the trend, this is very bullish. The sellers are selling, and the buyers are happy to soak up the volume. Distribution turns into re accumulation. A basing period that can be expected to be followed by more price appreciation. Note the first bar is a bearish up thrust.
5) Very bullish mark up phase, both rising volume and rising prices are significant. Take note the price appreciation and volume significance is the same as (1). Prices do move under the laws of physics, if there is a force present then there is motion. Expect much higher prices in the future. This rally ends with a buying climax.
6) Minor sell off, still very bullish as sell off volume is not significant. There is no price technical damage is done to the trend. Note the first bar is a bearish up thrust.
7) Bullish mark up, however volume support is less than significant and will prove to be bearish. Comparing volume in (7) to (6) it is actually very poor. This rally ends with a buying climax.
8) Minor sell off, however this is notching up as more bearish as the sell off volume is greater than the previous mark up phase at (7). There is no price technical damage is done to the trend. Note the first bar is a bearish up thrust.
9) Minor rally, on lower volume that (8), (7) and (6), and prices fail to make a new high. This weakness is very bearish.
10) As suspected from (9) a mark down phase. This time there is price technical damage is done to the trend. The bearish volume does not surpass the previous two sell offs, and this is very bullish. Note the first bar is a bearish up thrust.
11) After a minor basing period on low volume, a small advance that results in a sign of strength (SOS) supported by significant volume. Very Bullish. Note the first bar is a bullish spring. The technical price trend is beginning to repair.
12) After a two bar sell off (minor test of SOS), a full blown mark up phase out of the base built up during (11). Rising prices and and rising volume are both significant. Note the first bar is a bullish spring. You will also note the single bearish up thrust in the middle of the mark up phase is ignored by the buyers. The rally ends with a buying climax.
13) Something happened, and event maybe, as significant volume and price mark down proved to be very bearish. This time there is significant price technical damage is done to the trend.
14) A short bounce on weak volume is very bearish
15) Two periods of price depreciation on significant volume is very bearish. Only broken up by short term price bounces on poor volume, which is bearish. Note in at the start of the move multiple bearish up thrusts.
16) Price moves sideways on less selling volume, as selling expires, this is very bullish. Note within in this sell off action a bullish spring at the start that shows a line drawn in the sand by the buyers.
More detail can be found here: RTTVolumeWave