Combining Price and Volume to Predict Price Movement – Part 1

I use a lot of different indicators and methods, but the one that has shown me consistent success is price and volume at support and resistance. Support or resistance areas come at previous highs and lows (that is why stock and indexes develop trading ranges, they bounce off previous highs and lows). I will show you how price and volume react to previous highs and lows and why price pushes through or reverses at these points.

If you are looking to trade one of the most powerful pullbacks strategies available to traders today, order our newly updated guidebook -The Long Pullbacks Strategy – by by clicking here today.

Previous highs and lows in a stock or Index define current support and resistance areas. A Previous high or low in a stock or index is called a swing. I draw a horizontal trend line from the previous swing high or low to see at what price support or resistance will come in at in the future. These previous swing highs and lows are places where decisions are to be made for buy or sell orders. The horizontal lines drawn from previous highs and lows indicate where the support or resistance may come in the future.

Sometimes a picture is worth 1000 words. The Line graph of a stock or index below illustrates what a swing high and low are.

The following rules I have developed with price and volume came in part with studying the works of the master of price and volume, Richard Wyckoff. Mr. Wyckoff developed techniques in the 1930′s that combine price and volume of equities that had price predictability. The techniques he developed stood the test of time and still work to this day. I have expanded on these ideas and came up with the following rules that I use daily in my trading. In order to keep this article brief, I will not go into all of the rules, but here are some that we can go over. Here we will view a price history to see where buy and sell signals developed.

Rules that I follow using price and volume to determine buy and sell signals on the Nasdaq composite and the NYSE indexes

1. Test of a previous high or low on 8% or greater decrease in volume and closes back below the previous high (or above previous low) imply a reversal. The market needs to break the previous high or low and then close back into the trading range to prove the point.

2. Test of a previous high or low on 3% or less in volume shrinkage, imply that high or low will be exceeded.

3. Always compare volume relationship to first high or low; even on 3rd and 4th re-test. The volume buy and sell signal relationship stay the same.

B.

Important Note:

It’s not what the volume figures themselves are that is important on re-test of previous highs or lows, but rather what percentage increase or decrease the volume has against previous highs or lows. These volume relationships will define if the market will pass through or reverse at these previous highs and lows.

4. Markets that break to new highs (or lows) on near equal or increased volume and then reverse back into the trading range, the last high (or low) will be tested if not exceeded.

PS. The way to tell if the last high (or low) will be tested then reversed or exceeded is in the volume.

- If volume is at least 8% lighter on test of high (or low) then expect reversal.

- If volume is within 3% or less on test then expect continuation.

5. Markets that break to new high or low on 8% or greater decrease in volume and close outside of the trading range imply a false break and will come back into the trading range.

6. Tops and bottoms of “gaps” act and work the same way as previous highs and lows. Tops and bottoms of gaps act and work like previous support and resistance zones. The same volume percent relationship works with the “Gaps” as they do with re-test of previous highs and lows.

Next week, Tim Ord will apply these rules to actual stocks in order to give you a better idea of how price and volume can predict price movement.

Tim Ord is president, editor and publisher of “The Ord Oracle” established in 1990. His newsletter is a Monday through Thursday email report that trades the S&P, Nasdaq and gold issues. He is frequently listed in the top 10 market timers in the country.

Have You Switched to ConnorsRSI?

ConnorsRSI is the first Quantified Momentum Indicator -- the next-generation improvement to traditional RSI indicators. At Connors Research, we are using it as an overlay to many of our best strategies to make them even better -- now you can, too.

Enter your email address to get your FREE download of our Introduction to ConnorsRSI - 2nd Edition - Trading Strategy Guidebook with newly updated historical results.

Disclaimer: The Connors Group, Inc. ("Company") is not an investment advisory service, nor a registered investment advisor or broker-dealer and does not purport to tell or suggest which securities or currencies customers should buy or sell for themselves. The analysts and employees or affiliates of Company may hold positions in the stocks, currencies or industries discussed here. You understand and acknowledge that there is a very high degree of risk involved in trading securities and/or currencies. The Company, the authors, the publisher, and all affiliates of Company assume no responsibility or liability for your trading and investment results. Factual statements on the Company's website, or in its publications, are made as of the date stated and are subject to change without notice.
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results of any individual trader or trading system published by Company are not indicative of future returns by that trader or system, and are not indicative of future returns which be realized by you. In addition, the indicators, strategies, columns, articles and all other features of Company's products (collectively, the "Information") are provided for informational and educational purposes only and should not be construed as investment advice. Examples presented on Company's website are for educational purposes only. Such set-ups are not solicitations of any order to buy or sell. Accordingly, you should not rely solely on the Information in making any investment. Rather, you should use the Information only as a starting point for doing additional independent research in order to allow you to form your own opinion regarding investments. You should always check with your licensed financial advisor and tax advisor to determine the suitability of any investment.
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING AND MAY NOT BE IMPACTED BY BROKERAGE AND OTHER SLIPPAGE FEES. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.

All analyst commentary provided on TradingMarkets.com is provided for educational purposes only. The analysts and employees or affiliates of TradingMarkets.com may hold positions in the stocks or industries discussed here. This information is NOT a recommendation or solicitation to buy or sell any securities. Your use of this and all information contained on TradingMarkets.com is governed by the Terms and Conditions of Use. Please click the link to view those terms. Follow this link to read our Editorial Policy.