Volume Price Analysis

Long $SGYP day 246

Here is a little follow-up to my last analysis. I was just looking at the volume profile, because I hadn’t looked at in in a while. Lo and behold (what does that mean exactly? Where does it come from? Hello Google…), I see more validation of my idea from the last analysis.

First of all, what exactly is a volume profile? Well, a volume histogram is the typical volume bars you see under a chart that shows how much volume occurred in the given time frame. The profile is vertical, down the side of the chart, that shows how much volume occurred at a given price. You can see at what price most transactions are taking place.

Typically, ranges with low volume, low volume nodes (LVN), are more volatile. This is because less people are holding shares in that range, so generally there are larger spreads between prices and moving through these areas can be sporadic. Whereas, high volume price ranges, high volume nodes (HVN), are more liquid because the gaps between ownership are smaller and can move through these areas more smoothly.

So, it usually need above average volume to get through a LVN, and it needs to move through it quickly. Without enough volume, the price usually gets rejected at LVN’s. On the other hand, it doesn’t take much volume to move through HVN’s.

Here is an analogy, and then I’ll get to the point. Let’s say you need to cross a creek, the creek is a price range. There are stones in the creek you can walk on to cross it. If you are at a spot where there aren’t many stones, a LVN, then you will have to get a good running start to jump to each stone because the distance from stone to stone will be further. That running start is the volume that is needed to get past these areas. If you come to an area in the creek where there are lots of stones, a HVN, then it is easy to cross the creek because the stones are close together and you only need small steps to get from stone to stone. So naturally, you will want to find the area in the creek with lots of stones. Much like the price likes to settle where things are easy, so it is attracted to HVN’s

With that in mind, this may be easier to understand.

Ok, so let me explain what we’re looking at:

First, see the two yellow and one red lines pointed to by the arrows? The two yellow lines show the high and low of the fair value range. I’m honestly not sure how that is calculated, but it means that in that range is where the price wants to be. We are currently below the range in an unfair value area. The red line is called the point of control (POC). That is the highest area of volume in the fair value range and is supposed to be where the price is trying to settle at.

Second, that blue rectangle shows the price range we’ve been in for about a month now and the cumulative volume that has traded in that range. The big issue right now is that we are building a volume profile in the unfair value area. One of two things happen when it gets into an unfair value area, the price becomes reflective, or initiative. Reflective means it reverses out of the unfair value area and returns to the fair value area. Initiative means it lingers in the unfair value area and initiates a new volume profile in the unfair range. We are clearly being initiative. The problem with that is, if we do not return to the original POC, we will create a new POC lower, which will move the fair value area lower… not good!

Finally, at the top of that rectangle is that grey oval area. In there are short volume bars. That is an LVN challenge as I explained earlier. As an example of the price needing good volume to get through an LVN, look at the price action on 11/29 and 11/30. Those were two good green days that looked like a move off the bottom. However, there wasn’t much volume behind the move and as soon as it hit that LVN, it got rejected.

Now that you know what I’m looking at, here is what it could mean in relation to my last analysis:

Here is the same chart with some annotation to help you visualize what I’m saying. Remember I said to get past that LVN we will need a quick move on good volume. Well, that would coincide with the possible spring I talked about in the last post. The spring would be sprung by good volume and a quick move back into the trading range, which would be back above that magenta line at $2.43. So, in the volume profile, if we need a quick move to get past the LVN and headed back to the POC, around $3.00, that would also fulfill the typical action of a spring. The next probable part of the spring would be a retest of the trading range support, back at $2.43. Well, it just so happens that the lower bounds of the volume profile’s fair value is $2.57. So, if there were to be a retest after the spring, and it held around $2.57, it would again also fulfill the general pattern of the volume profile. A retest of $2.57 would keep the price within the bounds of fair value, which is where the price wants to be. Finally, after a passed retest, a move back to the POC around $3.00.

So, I see three things lining up to accomplish my belief. First, that line I drew in red would be the typical action of a spring. Second, it would also create the right side of the IH&S and third that same pattern would play out according to the volume profile.

I should note this is all on the daily, but the weekly is similar as in the previous post. On the daily, if all that works out and we do get back over the POC after a retest, we will get back into more LVN areas. Hopefully there will be enough momentum to get it past that $3.30 to $3.80 area. If it did, we would get back into some HVN areas that could lead to the $4.00 to $4.50 area and on to the upper bounds of the fair value area at about $5.76. Finally, a move into the upper unfair value area, which would be back to the trading range resistance in the $7.00 range. But, lets just focus on the POC at around $3.00 for now.

Fingers and toes crossed!

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