Accumulated Volume - Support and Resistance
Volume is perhaps the best indicator of all and should follow the price; if volume goes up, the price goes up. If this do not happen there is divergence and divergence is typical trading spots you want to look for. However, volume, sorted and accumulated, also allows to define support and resistance levels. Why would you trade a stock that is about to hit a resistance level if you can avoid it?
In the picture above, which is a snapshot of the FaceBook (FB) chart after trading 19 Dec 2018, you can see the accumulated volume as grey bars on the right hand axis. The bars indicate how much of the stocks been traded on each price during the chart period. The theory is very simple: people buying at given level will use this guide as decision point. Imagine you bought FB @ USD 131. The current price is USD 133.00. You are still @ profit and would consider USD 131 as another chance to buy cheap and since you’re human you will be reluctant to sell. That makes USD 131 a support level. The strength of the level depends on how many shares were sold and bought on that price (accumulated). Visually this is seen as longer or shorter bars or the right axis. On the other hand, if the stock turns up there is a lot of people who bought @ USD 145. These are impatiently waiting for stock to get back so they can dump their shares without losses. That is why USD 145 becomes a resistance level. It is very important to understand that liquidity and volatility of the share have huge influence.
Over time the importance of previous events is reduced. This also applies to accumulated volume. This simply means that recent volume is of more importance than previous volumes. The logic is that with time more and more people are getting out of their previous positions and therefore the resistance and support no longer have the same validity. In a technical analysis tool like ours, this can be accounted for by using “weighted accumulate volume”. When using weighted accumulated volume you emphasize recent volume more and emphasize less on past volume. As a trader you cannot remember all the small tweaks and twists, but you should understand the logic of how thing work as the same rule applies for all indicators in general. Over time you will see that support and resistance form accumulated volume actually works very well and should be a part of any trading strategy. There are a few unwritten rules, like the stock always will try 2 times to break a good resistance, so you never buy on first attempt. If not breaking on second attempt it most likely will not manage to do it in very short term. From the picture below we can see how FB tried to break through USD 152 twice without making it and caused a double top formation which triggered a sell signal.
Now you think you have it. Just look for the grey bars. Long bars mean good support or resistance. Put your buy or sell above or below depending on the aforementioned observation. However, it is a bit more complicated than that. You can have large transactions recorded due to fundamental issues like new stock issuance, bids etc. This are still valid as support/resistance, but do not have the same strength despite huge accumulated volume. This was the case of SnapChat (SNAP) where stocks were issued to investors with great discount and put out for trade @ market price. This lead most investors to take immediate profit and the stock plunged. What you should do, is look at clusters of accumulated volume. Just like shown above with red circles.
Lack of no trading at certain level (no accumulated volume - resistance or support) gives room for very rapid movements. Infact, these are one of my favorite trading opportunities. I often post these opportunities or threats on Twitter or other social media platform and in most cases I act on these myself. Below is is a sample of a tweet I wrote regarding no support for the SNAP stock, it was a super for a short, and the stock really took a heavy fall and made me a lot happier. You can not call every move correctly, but why would you buy knowing there is no good support below current level? The only reason I see is that you either know something nobody else does, or you don’t measure your risks, and that is a fast way to lose money.
Accumulated volume could be used as indicator alone, but combine it with volume and other indicators and it becomes even more powerful. The magic of numbers, like 1, 10, 100 also play a role, but if you study enough charts you will see that accumulated volume is often peaking around these numbers. If a resistance is met at already high volume (seen in bluish at the bottom of each chart) there is very little chance for resistance to be broken, while if it is met on low but rising volume there is a very good chance it will. The reason and logic is that there is a higher interest than resistance or in other words, more buyers than sellers and they just keep coming (rising volume).
In the picture above you can see SNAP as of Dec 19th 2018. Currently the price stands at not support and above is a ton of resistance. Your logic may say that it has fallen so much that it has to be a good buy case right now, but the fact is that technically this stock is doomed for an even deeper and quicker fall to USD 5. From a trading perspective it is far more lucrative to short than anything else. There is always a chance of some fundamental news disrupting the picture, an offer, a deal for something and often these are thrown out by the management itself in attempt to do some damage, control or try to influence the share price. No better example in the world for this trick than Elon Musk’s behavior @ Tesla. As careful trader with a good strategy you would avoid SNAP unless you take a short. If and when it turns it will still face lot of resistance and first between USD 7.50 and USD 9.00 there is a free lunch to grab at a decent risk/reward.
The lesson is that accumulated volume offers you a very good chance to time your buy and sell better. It also gives you an indication of what to expect. A lot of resistance will give a slower move upwards, than if there is little resistance. The same goes for support when vica versa. Now you can add this knowledge to your strategy. For example to never buy shares with lack of e.g 5% support under your buying level. This simple example will save your ass in many cases as it will allow you to get out before too much damage is done if the shit hits the fan. You should never depend on accumulated volume alone, but use it together with many other indicators. Personally I use accumulated volume as part of defining the stop-loss. More blog entries coming soon!
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