Next we are going to look at trend lines. We all use Trend lines and trend line breaks to decide reversals. We will look at trend lines with respect to VSA.
The general belief in TA is that Trend lines offer support in up trends and also act as resistances in downtrends. We will not go into the details of why and how of this belief. Instead we will look at the how volume and spread can give us clues whether the trend line will hold or break.
For example we will take an uptrend. When the stock retracts towards the trend line, small spreads and lower volume indicate as the stock approaches the trend line indicates that the stock is likely to be supported by trend line. Higher volumes and wide spread indicate a probability of a trend line break. Trend lines are resistance areas and effort is needed to break the trend lines. Wide spreads and high volumes are indications of this effort.
Many times we will see the SM absorbing the supply near trend lines. This is a bullish indication as the smart money is bullish on the stock and is interested in higher prices. So when there is lot of supply near trend lines they absorb the supply to keep the prices above the trend line.
Let us look at an example with a chart
One of the difficulties we face when analyze prices is determining whether the stock is going through a reversal or just a retracement. If we assume that a retracement is in progress and it turns out to be a reversal we end up giving away too much. At the same time if we assume a reversal then we would be out of the trade too soon. These apply specially for positional traders.
So how do we get a clue whether it is retracement or a reversal? Following are the basic things one should look at.
1. Lack of volatility
2. Small spreads
3. Decreased Volume
1. Increased Volatility
2. Large spreads. Especially Effort to Fall bars.
3. Increasing volume.
The simplest thing we can do is to draw arrows for the stock movement and the volume. In retracements you will the arrows are in the same direction. And in case of reversal the arrows will be in opposite directions.
.................................................text from PDF File User's Guide.
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