Support & Resistance in Volume Analysis

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When locating a support and resistance level, it is vital to monitor the behavior of volumes:

If volumes are reduced, it means that downward pressure has temporarily decreased, but sellers still have control of the market.

 

The market then stops its decline, rebounds, but only for the closure of short positions.

After this technical rebound, prices are likely to continue to fall.

 

On the market, in this case, a minimum has been formed, which does not constitute a valid/stable level of support and resistance.

If the volumes increase, it means that there has been an increase in upward pressure on the market.

 

In addition to closing short positions, there were also purchase flows from buyers who opened new long positions.

In this case, a significant minimum was formed, which is also a level of support (graphic and volumetric).

The Volume Analysis with Support and Resistance

Similarly, when identifying a resistance level, it is essential to monitor the behavior of the volumes:

If volumes are reduced, it means that downward pressure has temporarily decreased, but sellers still have control of the market.

The market then interrupts its rise and corrects, but only for the closure of long positions.

 

After this correction, it is therefore likely that prices will continue to rise.

On the market, in this case, a maximum was formed, which does not, however, constitute significant resistance.

 

If the volumes increase, it means that there has been an increase in upward pressure on the market. In addition to closing long positions, there was also a sales flow generated by sellers who opened new short positions.

On the market, in this case, a significant maximum was formed, which is also a considerable resistance.

 

To see if support or resistance will stop the price hike, we need to do some evaluations first.

 

Graphic evaluations

The amplitude and duration of the movement that pushed the prices in contact with the resistance/support, rather than the presence or lack of inversion figures.

Quantitative, covering the signals and indications provided by the various oscillators/technical indicators.

It is essential, from this point of view, to look for possible divergences between price and indicator developments.

 

support and resistance with volume analysis

 

Volumetric in nature, which relate to the behavior of volumes that have recently developed on the market.

 

We can have four different developments.

Let us examine, from a volumetric point of view, how the market comes to the test of resistance, and what are the consequences that could occur.

 

Support and Resistance and Volume

 

Resistance and Volume

First situation

A first situation sees increasing volumes during the upswing phase, with a significant peak occurring when prices reach the resistance area.

 

Around this area, there is, therefore, an essential battle between buyers and sellers:

this behavior confirms that the area reached by prices is an important area of resistance, which stops the rise in prices and triggers a rapid correction, during which a reduction in volumes occurs.

Second situation

A second situation sees volumes decreasing during the ascent phase.

This situation indicates that the buyers’ strength is shrinking. In this case, the climb stops due to a reduction in the upward pressure.

Prices weaken and are significantly corrected as volumes accompanying the decline increase.

 

Third situation

A third situation sees volumes steadily decreasing during the ascent.

This behavior signals a loss of momentum on the part of the market, which cannot extend further upwards.

Prices are rejected from the resistance zone and are quickly corrected. The volumes remain low even during the descent phase and show that even the strength of the sellers is not high.

It is likely, therefore, that prices have stopped rising only because of the closure of long positions, but no signs are indicating the presence of a distribution phase.

 

Fourth situation

A fourth situation sees volumes increasing steadily during the ascent.

On the market, therefore, buyers are entering with a specific decision. However, the resistance zone is not exceeded, because there is a marked strengthening of the downward pressure, which absorbs all the upward pressure and triggers a significant correction.

It is the development that often accompanies the formation of a critical maximum (top) on the market and signals the presence of a distribution phase.

 

Support and Volume

There are also four different ways to test a support area.

 

First situation

A first situation sees increasing volumes during the upswing phase, with a significant peak occurring when prices reach the resistance area.

There is, therefore, a decisive battle between buyers and sellers around this area.

This behavior confirms the importance of this support area, which stops the fall in prices and triggers a rapid technical rebound, during which, however, there is a reduction in volumes.

 

Second situation

A second situation sees volumes decreasing during the ascent phase. This situation indicates that the strength of the sellers is declining. In this case, the descent stops due to a reduction in the downward pressure.

Prices are rebounding significantly as the volumes accompanying the rise are increasing.

 

Third situation

A third situation sees volumes steadily decreasing during the ascent. This behavior signals a loss of momentum on the part of the market, which cannot continue in its downward movement.

The prices rely on the support area and make a quick technical rebound. Volumes remain low even during this phase of recovery and show that even the buyers’ strength is not high.

In this case, prices are likely to have stopped falling only because of the closure of short positions, but there are no signs of accumulation on the market (i.e., buyers who have opened new long positions have arrived).

 

Fourth situation

A fourth situation sees volumes steadily increasing during the downward movement, pushing prices towards the buffer zone. The pressure of the sellers is therefore high, but support does not subside, because there is a marked strengthening of the upward pressure on the market, which absorbs sales and triggers a significant rise. It is the development that often accompanies the formation of a critical minimum (bottom) and signals the presence of an exciting accumulative phase.

 

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My name is Luca. I grew up in Italy. I have a degree in law and I’m an independent trader since 2007. I’m a systematic trader and sometimes, I trade using options strategies with US ETFs and Stocks.I have built hundreds of automated trading systems and indicators for TradeStation, MultiCharts and MetaTrader.I started this blog in 2017 to share what I learned in the financial market.

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