Volume-Price Chart Patterns
Next bar as a confirmation of a Weakness
After you witnessed a sign of weakness (SOW), the next bar is an important as a confirmation of a this weakness.
It is important to understand that the next bar after SOW may not give us a confirmation of weakness. We may get it later. The examples of price-volume interpretation below are set to help understanding the changes in Bullish and bearish pressure (changes in Supply and Demand). When we know how to translate volume-price action into Supply-Demand language, we will understand what is going on and we will be able to make an informative bet on a future price trend.
The next after SOW bar is a wide-spread negative bar on high volume
Ideally close should be as low as possible - below the bar's middle point.
Interpretation:
The Bulls continue to fight the Bears - we continue to see high volume. However the Bears are very strong and dedicated and they continue to beat the Bulls - we see wide spread with low close. The Bulls are trying to acquire the strong increase in Supply, however the Demand cannot cover overvaluing Supply. We have extremely strong Bearish pressure and the Bulls are not capable to beat it.
In this case the odds are high we are at the begging of a strong decline.
The next after SOW bar is a wide-spread bar with high close (long lower shadow) on high volume
It does not rely matter whether this next bar is positive or negative. The bar's close price should be in the upper part of a bar - above the bar's middle point. Next bar has long bottom shadow and small body.
Interpretation:
As the Bears pushed price strongly down it attracted a new wave of the Bulls. This new wave of the Bulls was able to absorb an increase in Supply created by the Bears - we have high volume. This new wave of the Bulls not just absorbed the Supply, it created the unsatisfied Demand which pushed price up - we have long lower shadow.
We may see further decline, however, the odds of it happening are low. As a price drops to lower levels it will generate strong wave of new Bulls. If the Smart Money are the Bears in this case, they would have to shake off the strong Bulls before pushing price down - we could be facing side-way trading. Otherwise, the Bears could be exhausted and the previous up-trend could be restored.
In this case, current decline should be considered as an increased activity of the shorter-term traders who decided to take profit and who created an increase in Supply which was absorbed by the Smart Money who does not want to see a change in the current up-trend.
The next after SOW bar is a narrow-spread bar on higher volume
It does not rely matter whether the next bar is positive or negative. However, volume is higher than on next bar and price bar should have smaller body.
Interpretation:
Narrow range bar on high volume mean that the Supply match the Demand. Bullish and Bearish pressure are roughly equal. The Bears are strong so do the Bulls - we have increase volume.
In this case the situation is uncertain and we may see a bounce up. The Bears may decide to yield and come back later. At this point, the Bulls are too strong and it is not easy to break through their pressure. The Bulls are absorbing the increasing the Supply (increase in volume) and the odds are good the Bulls are the Smart Money in this case.
The next after SOW bar is a narrow-spread negative bar on high but lower volume
The bar should be negative. Volume is high but it is lower than volume seen on the SOW bar.
Interpretation:
Drop in volume suggests that the Bulls are yielding to the Bears. The Bullish pressure is on decline and the Bears continue to push down. This points to higher odds of further decline
The next after SOW bar is a narrow-spread negative bar on low volume
The main characteristic of the bar is strong drop in volume and narrow spread,
Interpretation:
Strong drop in volume means strong drop in Bullish pressure. We have narrow spread bar which mean we had a drop in the Bearish pressure as well. However, the Bearish pressure remains stronger (negative bar). The Bulls yielded to the Bears, however, the Bears are not willing to push strongly lover. It may look like the Smart Money (the Bears) did not distributed all they wanted . We still may see a downside action, yet, the odds are on a side-way action.
The next after SOW bar is a narrow-spread positive bar on low volume
The main characteristic of the bar is strong drop in volume and narrow spread.
Interpretation:
Strong drop in volume points to a strong drop in Bearish pressure (Supply). We have narrow spread bar which mean we had a drop in the Bullish pressure (Demand) as wel. However, the Bullish pressure is stronger. The Bears yielded to the Bulls, however, the Bulls are weak and they were not able to push strongly up. It may look like the Smart Money (the Bears) did not distributed all hey wanted and they want the Bulls push price higher to have the ability to distribute more at higher price levels. The odds are on a side-way and positive action and we have to watch or other signs of weakness.
The next after SOW bar is a wide-spread negative bar on low volume
The bar's close price should be in the lower part of a bar - below the bar's middle point. Volume should be at or below average volume.
Interpretation:
The Bulls surrounded their positions. The Bullish pressure went strongly down and strong drop in the Demand led to strong drop in volume. The Bearish pressure (Supply) remained strong and got another wide-spread negative bar. The luck of Demand and strong Supply suggest the higher odds of further decline
The next after SOW bar is a wide-spread positive bar on low volume
The bar's close price should be in the upper part of a bar - above the bar's middle point. Volume should be at or below average.
Interpretation:
We have got a strong decline in the Bearish pressure. Strong drop in Supply led to a strong drop in volume. The Bullish pressure (Demand) remained strong- we have a wide-spread positive bar. Based on this, we may assume, that the previously witnessed Sign of Weakness was not cussed by the Smart Money. Most likely, shorter-term traders placed orders to take profit by generating wide-spread negative bar on high volume. The Bulls (Smart Money in this case) used this decline to strengthen their positions by buying more. This favors the Bulls and the resumption of previously weakened up-trend.
The next after SOW bar is a wide-spread positive bar on high volume
The bar's close price should be in the upper part of a bar - above the bar's middle point. Volume should be high.
Interpretation:
The Bulls came strong onto the Bears - we still have high volume. The Bullish pressure (Demand) is not just strong, it overcame the Bearish pressure (Supply) by causing the wide-spread positive bar. That means that the fight continues. We may see a reversal down later. At this moment, the Bulls are on the winning side and the odds are on the Bullish side
Below, on the AMZN (Amazon) stock chart you may see an example when the next bar confirms SOW (Sign of Weakness):
- She AMZN stock was in up-trend when the Sign of Weakness was recorded. SOW - strong volume surge and long wide spread negative bar with long upper shadow when High and Low engulfing the previous bar.
- As the AMZN stock hit the top, and strong wave of the Bears invaded and absorbed all Demand which resulted in a strong volume surge.
- Tthis wave of the Bears created huge unsatisfied Supply which resulted in a strong decline from the top - wide spread negative bar with long upper shadow.
- The next bar confirmed the Sign of Weakness. It was narrow spread positive bar on lower on high volume with a strong gap down. The Bears defeated the Bulls - the Supply overloaded the Demand and the Bears started to push price lower.
By V. K. for MarketVolume.com
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