Volume and Open Interest
Volume action and the strength of a price barrier
An indication as to the potential strength and reliability of a price barrier may
also be gauged from the action of volume at or across the point of support or
resistance. Figure 6.18 shows two scenarios for resistance and support. Sup-
port and resistance formed at a volume peak are generally regarded as the
most reliable and provide the strongest barrier to future retests. This is because
even with the large surge in volume, price was still unable to penetrate the
barrier. This gives traders confidence that the price barrier should hold up on
future retests. Since expectation is everything in the market, this goes a long
way to garner confidence in the barrier. Support and resistance formed across
a volume dip or trough is considered less reliable since the reason for price
not being able to penetrate the barrier is mainly due to a lack of interest or
participation at the price barrier. Traders were not interested in taking price
through the barrier. Hence the barrier only held up due to a lack of buying or
selling pressure.
In fact, there are five possible scenarios of volume action associated with sup-
port and resistance, which are:- Volume increasing across support or resistance
- Volume decreasing across support or resistance
- Volume peaking at support or resistance
- Volume bottoming at support or resistance
- Volume flatlining across support or resistance
Volume increasing or decreasing across a barrier signifies a change in sentiment at
the barrier (see Figure 6.19). Increasing volume as price approaches the barrier gives
the impression that there may be sufficient market force to drive price through it. ButfIgure 6.18 Price Barrier Strength and Reliability.