Last evening, I presented some introductory thoughts about how I approach the the Price by Volume profiles that I have been using to find “volume voids” in stocks. Let’s take a moment and explore the consequence of a reduced volume area (and it is an area, because it can be measured in 2 dimensions, in this case time and price).
I have long thought that the volume of shares traded in a stock has to be of some significance, but over time, I have found there to be little value to the traditional cumulative volume bar. We hear all the time about “low volume rallies”, “high volume breakouts”, etc…but, especially on shorter-term time frames (daily and under) I find that there is little discernible or tradable information that can be gleaned from them.
On a weekly and monthly chart you can start to see signs of accumulation or distribution, but even (for me at least) that information is dubious.
Basically, ‘traditional’ volume analysis doesn’t provide me with any sort of tradable “edge”…great, so there was heightened interest in the stock on a particular day, hour, minute, whatever. I have found that information to be essentially worthless…to the point where I didn’t pay attention to volume (unless I was looking for a very particular pattern that coincided with volume “drying up”) for a number of years.
Nevertheless, I knew that there had to be value in keeping a record of volume, but I using time as the dependent variable is (to me) not the answer.
I have always thought that the quantity of shares being bought and sold had to hold some sort of significance. Since I have started using the Price by Volume indicator, I have found this to be a much more effective means for analyzing volume. Instead of placing significance on the time variable (i.e., traditional volume analysis), Price by Volume analysis places the emphasis on the PRICE at which shares are being bought and sold. It seems to me that this information holds much more weight than simply saying stock ABC traded at 2.5x normal daily volume.
For example, you can look at a ten year record of a stock and see that significantly more shares were traded between, say 15 and 20 than there were between 20 and 30.
What this means to me is that the region between 15 and 20 suggests a pricing equilibrium. For the most part, in the time frame selected (longer is always better, IMO, with Price by Volume analysis) buyers and sellers agree that this is a “fair value” for the stock (though not necessarily from a traditional valuation perspective).
When price moves into the volume “void” there is no consensus on the value of the stock…historically speaking, people didn’t buy in this region and they also didn’t sell in this region. So, theoretically, there will be a limited resistance (or support, but I’m not as confident in this analysis as a shorting tool) to keep the a stock from advancing. There is indecision, there is limited supply and heightened demand.
I’m going to delve into this in greater detail in a future post, but where this could really interesting is with stocks that are making all-time highs.
My day is about to come to an end, so I need to wrap this up.
Lastly, let me say that I am by no means an expert on this topic and, in fact, am just beginning to really delve into this…so if you have thoughts/experiences/whatever in regard to Price by Volume analysis, please feel free to share them in the comments section so that we can try to continue the learning process.
My best to you all.