Volume and Open Interest
such reversals as low volume reversals. In Figure 6.9, we observe price breaking out
from an accumulation after volume declined to its lowest level. We also observe two
low volume reversals just prior to the consolidation, at time lines 1 and 2.
In Figure 6.10, we observe three consolidation breakouts occurring whenever
the lowest or minimum volume level is tested. Notice an increase in volume on the
breakout bars, as seen on bars 1, 2, and 3 in the chart.Volume‐Weighted average price/Moving average (VWMa)
A volume‐weighted moving average (VWMA) may also be created to track over-
valued and undervalued stock in the market. Typically, price is considered po-
tentially bullish when it is above the VWMA, and bearish when below it. For a
detailed calculation of the VWMA, refer to Chapter 11. In Figure 6.11, we notice
price rising decisively every time it crosses above the VWMA and declining in a
similar manner when it crosses below it. We also notice that the crossovers occur
at the daily volume cycle peaks.
It should be noted that the stock is regarded as undervalued if it lies below the
VWMA and overvalued if it is above it. Hence many institutional traders deem it
advantageous to only look for buy signals for a particular stock or market when
it is undervalued with respect to the VWMA, and sell signals when it is above it.fIgure 6.9 Volume as a Reversal and Breakout Timing Indicator on the Daily Chart
of Apple Inc.
Courtesy of Stockcharts.com