SWINGS
By studying the works of Richard Wyckoff, the master of price and volume, I have developed some rules using the price/volume relationship. Wyckoff developed techniques in the 1930s that combine price and volume of equities with price predictability. The techniques he developed stood the test of time and still work to this day. I expanded on his ideas and came up with several rules that I use daily in my trading. Let’s go over these rules and look at a price history to see where buy and sell signals developed.
TRADING RULES
Here are the rules that I follow, using price and volume to determine buy and sell signals on the Nasdaq Composite and the New York Stock Exchange (NYSE) indexes:
1 When price tests a previous high or low on an 8% or larger decrease in volume and closes back below the previous high (or above the previous low), it implies a reversal. The market needs to break the previous high or low, then close back into the trading range.
2 When price tests a previous high or low on a 3% or smaller decrease in volume, it implies that the high or low will be exceeded.
3 Always compare the volume relationship to the first high or low, even on the third and fourth retest. The buy and sell signal relationship stays the same (Figures 4A and 4B). It’s not the volume figure that is important on a retest of previous highs or lows, but the percentage increase or decrease in volume relative to previous highs or lows. These volume relationships will signal if the market will pass through or reverse at these previous highs and lows.
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4 When markets break to new highs (or lows) on near-equal or increased volume, then reverse back into the trading range, the last high (or low) will be at least tested, and possibly rally through to the next swing high or low. But how do you tell if the last high (or low) will be tested and then reverse or continue through? The answer lies in the volume.
• If volume is at least 8% lighter on the test of high (or low), then expect a reversal.
• If volume is within 3% on the test, then expect continuation.
5 Markets that break to new highs or lows 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/lows and previous support/ resistance zones. The same volume percent relationship works with the gaps as with retest of previous highs and lows.
Note: If the market cannot take out the previous high on near equal or greater volume, it will reverse and try to take out the previous low of the same degree on near-equal or greater volume. The reverse applies for the lows.
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