THE HAndbook oF TEcHnIcAl AnAlySISas prices start to reverse at the barrier volume picks up, driving price away from it
with either bearish or bullish confirmation. Conversely, decreasing volume as price ap-
proaches the barrier gives the impression that there may be insufficient market force
to drive price through it. But as prices starts to reverse at the barrier, volume declines
even further. Decreasing volume across support and resistance tends to see a retest of
the barrier, and in more extreme circumstances, may even see price return to penetrate
the barrier. Finally, flatlining volume across support and resistance does not provide
enough information about potential future action of price with respect to the barrier.
filtering Volume action
There are a numerous ways to filter volume in order to identify the most signifi-
cant volume action, some of which include employing:
■ (^) A moving average filter
■ (^) A volatility filter
■ (^) Prior volume peaks
■ (^) Volume cycles
setting up a smoothed Volume filter A smoothed volume filter is simply a
moving average based on volume, instead of price. To select the most effective
lookback period, a simple backtest may be required to identify the amount of
filtering that is appropriate for a particular trade setup. Some practitioners also
employ some multiple or harmonic based on the the dominant trading cycle pe-
riod, usually setting the moving average to either the dominant cycle period or one
half of it. In either case, whenever volume spikes above this overextended moving
fIgure 6.19 Volume Action Associated with Support and Resistance.