The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

Volume and Open Interest

two white boxes. The last step is to locate the closest peak or peaks above the area

of intersection. This will potentially represent the most significant and reliable

resistance level within the price formation. To locate the most significant support

level, we locate the closest trough or troughs below the area of intersection. This

will potentially represent the most significant and reliable support level within the

price formation. We see both significant support and resistance levels acting as ef-

fective barriers to price action on the daily chart of 3M Co.

Volume to bar range (spread) relationship The relationship between bar

range (spread) and volume may also be used to forecast potential breakouts and

reversals.

The four basic combinations of bar range and volume are:

1. Narrow range on low volume (Low Volume Rest Bar): Indicates a potential
   for reversal especially during a strong and rapid up or downtrend. For weak to
   average trends, it tends to indicate a point of rest. It reflects a lack of participa-
   tion. See Example 1 in Figure 6.30.


2. Narrow range on high volume (High Volume Reversal Bar): Indicates a strong
   potential for a reversal. In an uptrend, price remains confined to a narrow
   range on very large volume. If the volume represented buying pressure, the
   range would be much wider. Hence, this is indicative of sellers attempting to
   take control. It is a bearish signal. The converse applies for downtrends. See
   Example 2 in Figure 6.30.


3. Wide range on low volume (Low Volume Reversal Bar): Indicates a potential
   for reversal as the large price move was backed or supported by a relatively
   low amount of participation. It reflects a lack of interest. The longer the price
   bar on low volume, the more bearish it is in an uptrend and bullish in a
   downtrend. See Example 3 in Figure 6.30.


4. Wide range on high volume (High Volume Continuation Bar): Indicates a po-
   tential for continuation as the large price move was backed and supported by a
   very large amount of participation, that is, interest in seeing price continue. It is
   bullish in an uptrend and bearish in a downtrend. See Example 4 in Figure 6.30.

fIgure 6.30 Volume‐Bar Range Relationship.