Investing with Volume Analysis -...

Praise for Investing with Volume Analysis

“Investing with Volume Analysis is a compelling read on the critical role thatchanging volume patterns play on predicting stock price movement. As buyers andsellers vie for dominance over price, volume analysis is a divining rod of profitableinsight, helping to focus the serious investor on where profit can be realized and riskavoided.”

—Walter A. Row, III, CFA, Vice President, Portfolio Manager, Eaton VanceManagement

“In Investing with Volume Analysis, Buff builds a strong case for giving moreattention to volume. This book gives a broad overview of volume diagnosticmeasures and includes several references to academic studies underpinning theimportance of volume analysis. Maybe most importantly, it gives insight into theVolume Price Confirmation Indicator (VPCI), an indicator Buff developed to moreaccurately gauge investor participation when moving averages reveal price trends.The reader will find out how to calculate the VPCI and how to use it to evaluate thehealth of existing trends.”

—Dr. John Zietlow, D.B.A., CTP, Professor of Finance, Malone University (Canton, OH)

“In Investing with Volume Analysis, the reader … should be prepared to discover atrove of new ground-breaking innovations and ideas for revolutionizing volumeanalysis. Whether it is his new Capital Weighted Volume, Trend Trust Indicator, orAnti-Volume Stop Loss method, Buff offers the reader new ideas and toolsunavailable anywhere else.”

—From the Foreword by Jerry E. Blythe, Market Analyst, President of WinthropAssociates, and Founder of Blythe Investment Counsel

“Over the years, with all the advancements in computing power and analysis tools,one of the most important tools of analysis, volume, has been sadly neglected. Yes, itis true that it is included in all analysis programs, but the art and science has beenalmost lost. Buff’s new book should take care of that neglect and restore volume toits rightful place. They say, ‘In the land of the blind, the one-eyed man is king.’ Thisbook will give technicians both eyes. It is clear, well written, and step-by-steps givethe reader the tools to understand this important tool putting volume analysis in itsproper historical context. It is highly recommended.”

—Richard Mogey, CMF Investment Advisors

“This book forced me to think in new investment directions and to re-evaluate myprevious strategies.… I gained insights that were groundbreaking for me.”

—Dr. Dennis Henlsey, Taylor University

“I found Investing with Volume Analysis of great interest. Any new study of volumeand its great technical importance demands immediate attention. It is good to haveBuff’s new ideas and discoveries added to the history and importance of volume intechnical analysis. My sincere thanks to Buff for his great work and contribution.”

—Joseph E. Granville, The Granville Market Letter

“The author has gathered in one place all of the major methods and theories thatdeal with volume in the stock market and has recognized volume as an equalpartner with price in the workings of market and stock movements. He puts it alltogether into usable and readable guidance, using effective analogies and occasionalhumor.”

—Richard W. Arms, Jr., Arms Advisory

“Buff presents a thorough discussion of the utility of volume and volume-basedmarket indicators, both traditional and of his own creation. Fellow market analystscan be glad for this resource and the fact that the VPCI on Buff himself is in astrongly rising trend.”

—Robert Prechter, CMT, and Dave Allman, Elliott Wave International

“I really enjoyed and appreciated the author’s ability to combine volume with manyof the basic indicators used by technicians today.”

—Ralph J. Acampora, CMT, Managing Director, Altaira Investment Solutions

“I trade for a living and don’t have time for fluff and puff. Buff tossed facts andfigures in my face like a silver cross in front of a werewolf. He is on to much here, asyou will see. This book is not a morsel; it’s a nine-course meal. Dig in.”

—Larry Williams, Private Trader, World Cup Trading Champion

“For every stock trade that takes place, three key pieces of information arerecorded: price, time, and size. It is from these three pieces of data that we deriveall the key information that technical analysts use to examine a stock’s behavior. Ifyou are only looking at prices, then you are throwing out a whole lot of keyinformation.

Buff’s book teaches you how to take that information about the size of trades andturn it into the seven types of volume indicators. Better still, he teaches you how touse those tools to improve your own trading.”

—Tom McClellan, Editor, The McClellan Market Report

Investing with Volume Analysis

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Investing withVolume AnalysisIdentify, Follow, and

Profit from Trends

Buff Pelz Dormeier

Vice President, Publisher: Tim MooreAssociate Publisher and Director of Marketing: Amy NeidlingerExecutive Editor: Jim BoydEditorial Assistant: Pamela BolandOperations Manager: Gina KanouseSenior Marketing Manager: Julie PhiferPublicity Manager: Laura CzajaAssistant Marketing Manager: Megan ColvinCover Designer: Alan ClementsManaging Editor: Kristy HartProject Editor: Jovana San Nicolas-ShirleyCopy Editor: Deadline Driven PublishingProofreader: Language Logistics, LLCIndexer: Larry SweazyCompositor: Nonie RatcliffManufacturing Buyer: Dan Uhrig© 2013 by Pearson Education, Inc.Publishing as FT PressUpper Saddle River, New Jersey 07458This book is sold with the understanding that neither the author nor the publisher isengaged in rendering legal, accounting, or other professional services or advice by pub-lishing this book. Each individual situation is unique. Thus, if legal or financial advice orother expert assistance is required in a specific situation, the services of a competent pro-fessional should be sought to ensure that the situation has been evaluated carefully andappropriately. The author and the publisher disclaim any liability, loss, or risk resultingdirectly or indirectly, from the use or application of any of the contents of this book.Technical analysis is only one form of analysis. Investors should also consider the merits ofFundamental and Quantitative analysis when making investment decisions. Technicalanalysis is based on the study of historical price movements and past trend patterns. Thereis no assurance that these movements or trends can or will be duplicated in the future.The solutions discussed might not be suitable for your personal situation, even if it is simi-lar to the example presented. Investors should make their own decisions based on theirspecific investment objectives and financial circumstances. The material has been pre-pared or is distributed solely for information purposes and is not a solicitation or an offerto buy any security or instrument or to participate in any trading strategy. FT Press offers excellent discounts on this book when ordered in quantity for bulk purchases or spe-cial sales. For more information, please contact U.S. Corporate and Government Sales, 1-800-382-3419, [email protected]. For sales outside the U.S., please contact InternationalSales at [email protected] and product names mentioned herein are the trademarks or registered trademarks of theirrespective owners.All rights reserved. No part of this book may be reproduced, in any form or by any means, withoutpermission in writing from the publisher.Printed in the United States of AmericaFirst Printing: November 2012ISBN-10: 0-13-338104-8ISBN-13: 978-0-13-338104-7Pearson Education LTD.Pearson Education Australia PTY, Limited.Pearson Education Singapore, Pte. Ltd.Pearson Education North Asia, Ltd.Pearson Education Canada, Ltd.Pearson Educatión de Mexico, S.A. de C.V.Pearson Education—JapanPearson Education Malaysia, Pte. Ltd.Library of Congress Cataloging-in-Publication Data is on file.This product is printed digitally on demand. This book is the paperback version of an original hardcover book.

Contents

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Chapter 1: Two Perspectives of Market Analysis . . . . . 5Building a Firm Foundation . . . . . . . . . . . . . . . . . 5Two Legitimate Approaches . . . . . . . . . . . . . . . . . 6The Fundamental Approach. . . . . . . . . . . . . . . . . 8The Technical Approach . . . . . . . . . . . . . . . . . . . . 9Driving a Comparison Between Fundamentaland Technical Analysis . . . . . . . . . . . . . . . . . . . . 10

Chapter 2: The History of Technical Analysis . . . . . . . 12The First Recorded Investment—A Fill orBe Killed Order. . . . . . . . . . . . . . . . . . . . . . . . . . 12Babylonian Charts . . . . . . . . . . . . . . . . . . . . . . . . 14Early European Markets. . . . . . . . . . . . . . . . . . . 14Samurai Trading . . . . . . . . . . . . . . . . . . . . . . . . . 14Early American Market Analysis . . . . . . . . . . . . 15The Root—Charles H. Dow. . . . . . . . . . . . . . . . 15The Shoots—William Peter Hamilton and Other Dow Theorists . . . . . . . . . . . . . . . . . . . . . 17Budding Practitioners . . . . . . . . . . . . . . . . . . . . . 17The Rise of the Fundamentals . . . . . . . . . . . . . . 19Market Analysis in Today’s Efficient Markets . . 22Contrasting the Ages . . . . . . . . . . . . . . . . . . . . . . 24Setting the Record Straight—Dow Theory Strikes Back . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Chapter 3: Price Analysis . . . . . . . . . . . . . . . . . . . . . . . 27The Market’s Price Is Right . . . . . . . . . . . . . . . . 28The Basic Building Block of the Chart. . . . . . . . 28Volume Analysis: Digging Deeper . . . . . . . . . . . 30

Chapter 4: Volume Analysis . . . . . . . . . . . . . . . . . . . . . 32Volume. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Volume Terminology . . . . . . . . . . . . . . . . . . . . . . 33Volume Data in Market Analysis . . . . . . . . . . . . 33Volume Validates Price . . . . . . . . . . . . . . . . . . . . 34Volume Liberates Liquidity . . . . . . . . . . . . . . . . 35Volume Substantiates Information . . . . . . . . . . . 35Volume Reveals Convictions. . . . . . . . . . . . . . . . 35Volume Expresses Interest and Enthusiasm . . . 36Volume Denotes the Disparity of Opinions . . . . 36Volume Is the Fuel of the Market . . . . . . . . . . . 36Volume Exposes the Truth . . . . . . . . . . . . . . . . . 37Volume Is the Cause . . . . . . . . . . . . . . . . . . . . . . 37Volume Gives Rise to Velocity . . . . . . . . . . . . . . 38

Chapter 5: Volume: The Force of the Market . . . . . . . 39Volume Is the Force . . . . . . . . . . . . . . . . . . . . . . 39Volume Leads Price . . . . . . . . . . . . . . . . . . . . . . 39Volume Interprets Price . . . . . . . . . . . . . . . . . . . 40B = S = T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41Volume Analysis—Use the Force . . . . . . . . . . . . 43Support and Resistance. . . . . . . . . . . . . . . . . . . . 43Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44Every Object in a State Motion Stays in Motion Unless Acted Upon . . . . . . . . . . . . . . . . 46Force = Mass × Acceleration . . . . . . . . . . . . . . . 47Every Action Has an Equal and OppositeReaction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50Applying the Laws of Motion in VolumeAnalysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Chapter 6: How to Read the Market Like a Book . . . . 53Reading the Tape . . . . . . . . . . . . . . . . . . . . . . . . 54Understanding the Symbols of the Language . . 54This Is the Market, Allow Me toIntroduce You . . . . . . . . . . . . . . . . . . . . . . . . . . . 55Fear and Greed . . . . . . . . . . . . . . . . . . . . . . . . . . 56

viii INVESTING WITH VOLUME ANALYSIS

Volume: The Technician’s DecryptionDevice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57Analyzing Price and Volume Bar by Bar . . . . . . 58The Four Basic Phases of Closing Price BarAnalysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58The Price Bar Is the Market’s DNA . . . . . . . . . . 59Volume Is the Market’s RNA . . . . . . . . . . . . . . . 60Volume Price-Spread Analysis . . . . . . . . . . . . . . 61High Volume Depreciation. . . . . . . . . . . . . . . . . 64Low Volume Price Movements . . . . . . . . . . . . . 67

Chapter 7: Volume in Trends . . . . . . . . . . . . . . . . . . . . 73Identifying Trends. . . . . . . . . . . . . . . . . . . . . . . . 73Trends: The Words of the Market . . . . . . . . . . . 74Drawing Trend Lines . . . . . . . . . . . . . . . . . . . . . 74Evaluating the State of the Trend withVolume Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . 77The Four Phases of Volume Analysis . . . . . . . . . 78Volume Rules and Laws: Cracking theContradiction Code. . . . . . . . . . . . . . . . . . . . . . . 85Volume Seasonality Trends . . . . . . . . . . . . . . . . . 91

Chapter 8: Volume in Patterns . . . . . . . . . . . . . . . . . . . 93Patterns: The Market’s Narrative . . . . . . . . . . . . 93Plots: The Interactions of Two Major Trends . . 94Bullish Flags and Pennant Formations . . . . . . 108

Chapter 9: Measuring Volume Information . . . . . . . 112The Seven Types of Volume Indicators . . . . . . 114Optimization: A Warning . . . . . . . . . . . . . . . . . 116

Chapter 10: Pure Volume Indicators . . . . . . . . . . . . . . 118Volume. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118Volume Moving Averages . . . . . . . . . . . . . . . . . 119Volume Oscillators . . . . . . . . . . . . . . . . . . . . . . 120Volume Bands . . . . . . . . . . . . . . . . . . . . . . . . . . 120

CONTENTS ix

Volume Accumulation. . . . . . . . . . . . . . . . . . . . 121Volume at Price . . . . . . . . . . . . . . . . . . . . . . . . . 122Price: Volume/Crocker Charts . . . . . . . . . . . . . 124

Chapter 11: Interday Volume AccumulationIndicators . . . . . . . . . . . . . . . . . . . . . . . . . 127On-Balance Volume . . . . . . . . . . . . . . . . . . . . . 128Volume Price Trend . . . . . . . . . . . . . . . . . . . . . 130Intraday Volume Accumulation Oscillators . . . 130

Chapter 12: Intraday Volume AccumulationOscillators . . . . . . . . . . . . . . . . . . . . . . . . 132Intraday Intensity Index/Accumulation Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133Williams’ Variable Accumulation Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133Williams’ Accumulation Distribution . . . . . . . . 134Intraday Volume Accumulation Oscillators . . . 136

Chapter 13: Price Range Volume Indicators . . . . . . . . 140Market Facilitation Index . . . . . . . . . . . . . . . . . 140Equivolume Charting . . . . . . . . . . . . . . . . . . . . 142Ease of Movement . . . . . . . . . . . . . . . . . . . . . . 144

Chapter 14: Price Accumulation Based on VolumeIndicators . . . . . . . . . . . . . . . . . . . . . . . . . 147Positive and Negative Volume Indexes . . . . . . 147

Chapter 15: Tick-Based Volume Indicators . . . . . . . . . 151Volume-Weighted Average Price . . . . . . . . . . . 152Money Flow/Tick Volume. . . . . . . . . . . . . . . . . 152

Chapter 16: Volume-Weighted Price Indicators . . . . . 157The Money Flow Index. . . . . . . . . . . . . . . . . . . 158Volume-Weighted Moving Averages . . . . . . . . 159VW-MACD . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168Trend Thrust Indicator . . . . . . . . . . . . . . . . . . . 171

x INVESTING WITH VOLUME ANALYSIS

Chapter 17: The Volume Price ConfirmationIndicator . . . . . . . . . . . . . . . . . . . . . . . . . . 182The Calculation . . . . . . . . . . . . . . . . . . . . . . . . . 183Using VPCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185VPCI in Action . . . . . . . . . . . . . . . . . . . . . . . . . 190The Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194Other Applications: Comparing the VPCIto Other Price-Volume Indicators . . . . . . . . . . 198Other Applications . . . . . . . . . . . . . . . . . . . . . . 204

Volume Indicators Table . . . . . . . . . . . . . 205

Chapter 18: A Compendium of Breadth Indicators . . . . . . . . . . . . . . . . . . . . . . . . . 209Market/Breadth Statistics . . . . . . . . . . . . . . . . . 209Breadth Statistics: A Source of MarketInformation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211Warning Construction Ahead: BreadthData Pit Falls. . . . . . . . . . . . . . . . . . . . . . . . . . . 214Breadth-Based Indicators . . . . . . . . . . . . . . . . . 218Positive and Negative Volume Index . . . . . . . . 219Arms Index/TRIN . . . . . . . . . . . . . . . . . . . . . . . 220

Chapter 19: Buff Up Your Volume: Introducing Capital Weighted Volume . . . . . . . . . . . . 226It’s Time to Buff Up Your Volume . . . . . . . . . . 226Traditional Volume: Price Volume Relationship Disconnect . . . . . . . . . . . . . . . . . . 227Blue Chips to Cow Chips . . . . . . . . . . . . . . . . . 229Index Volume Analysis Alternatives . . . . . . . . . 231Cap-Weighted Volume . . . . . . . . . . . . . . . . . . . 232Comparing Traditional Volume Talliesto Cap-Weighted Volume . . . . . . . . . . . . . . . . . 233Flash Crash: Cap-Weighted Volumein Action. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235Cap-Weighted Volume: Rebuilding Breadth Indicators . . . . . . . . . . . . . . . . . . . . . . 238

CONTENTS xi

Chapter 20: Risky Business . . . . . . . . . . . . . . . . . . . . . 241The Best Offense Is a Good Defense. . . . . . . . 241The Best and the Worst of It . . . . . . . . . . . . . . 243The Buy and Hope Strategy . . . . . . . . . . . . . . . 245Dynamic Asset Allocation . . . . . . . . . . . . . . . . . 248Risk Management . . . . . . . . . . . . . . . . . . . . . . . 251The Anti-Volume Stop Loss . . . . . . . . . . . . . . . 253The Best Mistakes Are the Realized Ones. . . . 256

Chapter 21: Putting It All Together: Volume-DictatedStrategies . . . . . . . . . . . . . . . . . . . . . . . . . 259Employing Volume-Based Strategies . . . . . . . . 260Understanding the Market: Supply andDemand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260Building an MPS with IndividualStock Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269The Four Phases of Volume Analysis . . . . . . . . 270

Chapter 22: Modern Day Volume Issues . . . . . . . . . . . 281How Trading Volume Has Changed. . . . . . . . . 281Contrasting Market Ages . . . . . . . . . . . . . . . . . 293The Effect of Changes in Market Structureon Volume Analysis . . . . . . . . . . . . . . . . . . . . . . 302Volume Data Reliability . . . . . . . . . . . . . . . . . . 303

Bibliography . . . . . . . . . . . . . . . . . . . . . . . 306

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Foreword

Volume, price, and time are fundamental concepts in marketanalysis.

Volume tracks quantities of things, whether shares of stocks, con-tracts in options, or commodities. In business, volume tracks sales,inventory, customers, and the amount of goods bought or sold.

In Investing with Volume Analysis, Buff Dormeier presents newideas, digging deeper into volume by identifying secrets these oftenoverlooked statistics hold. He has devised methods for identifyingwhen to climb on board and stay with sustainable trends, and perhapsmore importantly, when to bail out of trends when unsustainable.

The Volume Price Confirmation Indicator (VPCI) is his creation,and it helps identify these situations. It was a significant enough dis-covery to earn him the internationally prestigious Charles DowAward in 2006, only given to a work deemed surprisingly new andinnovative.

Buff’s career has combined both fundamental and technicalanalysis. Earlier, as a student of fundamental analysis, he reviewedthe business activities of management and made forecasts based on acompany’s financial history and forward guidance. He wanted furtherunderstanding about a stock’s price behavior and began studyingtechnical analysis.

He found that technical analysis, at its core, is about the flow ofmoney into and out of securities. Yet these technical findings werenot always consistent with what fundamental analysts and companymanagement were saying. As an analytic approach, he settled on twoprimary tools: price and volume.

His DiscoveryBuff learned that analysts had been combining price with many

metrics in gauging market behavior, but many of the metrics did not

include volume. He then remembered an important concept he usedin fundamental analysis for assessing the overall health of the econ-omy, the turnover of money. A healthy economy turns money overfaster than a weak economy. So he set out to measure money flow inthe markets.

He turned to one of the grandfathers of technical analysis andmasters in volume analysis, Joseph E. Granville, and he studied hisOn-Balance Volume concepts. Many considered these concepts ahallmark in technical analysis. Granville taught that volume precedesprices. That resonated.

Buff wondered if there might be a way to measure a dynamicrelationship between price and volume, one that one might influencethe other, and he wondered whether he could design a method fordiscerning such nuances when they occurred.

He examined the differences between a volume-weighted mov-ing price average and the corresponding simple moving price aver-age. The differences he found would often expose information aboutthe relationship between price and volume that was not visible anyother way. He now had a way to assess the staying power or enthusi-asm of investors, the force behind price moves. He had a metric forgauging the flow of money.

Although this topic of volume analysis is by nature quite techni-cal, Buff is skilled at presenting and documenting the essentials ofvolume theory with exceptional clarity. He explains the depths of vol-ume analysis with amazing simplicity, and he shows by example notonly what works but why it works.

In Investing with Volume Analysis, the reader should find manypearls of wisdom from such technical giants as Charles Dow, RichardWyckoff, and Joseph Granville. He should be prepared to discover atrove of new ground-breaking innovations, ideas for revolutionizingvolume analysis. Whether it is his new Capital Weighted Volume,Trend Trust Indicator, or Anti Volume Stop Loss method, Buff offersthe reader new ideas and tools unavailable anywhere else.

—Jerry E. Blythe, Market AnalystPresident of Winthrop AssociatesFounder of Blythe Investment CounselFormer Editor and Publisher of the Market Consensus Letter

xiv INVESTING WITH VOLUME ANALYSIS

AcknowledgmentsI would like to personally thank Dr. Jerry Blythe for all his help

with the book. Your broad insights, professional resources, and tech-nical expertise have proven to be very valuable. Further appreciationgoes to Joseph Granville. Thank you, Joe, for sharing your wisdom.Your depth of knowledge about volume surpasses all.

I would also like to thank Tom McClellan. Tom, you are a brillianttechnician. Your expertise in market breadth has been invaluable tome. You have given me many excellent suggestions, pointed out someinconsistencies, and provided me with some great resources. More-over, you have given me many terrific ideas about how to rephrasesentences and even paragraphs, plus you have provided many valu-able quotes and charts. Thanks a bunch, Tom.

I would like to offer praise for others who helped me with thiswork, such as Steve Poser, George Schade, and Dr. John Zietlow.Steve, your knowledge of technical analysis and market structure isoutstanding. Thank you for your help, expertise, and advice withmodern volume issues! In my search for original resources, GeorgeSchade was hot on the trail like a bloodhound on a fresh scent! Thankyou for your help and your pursuit and passion for truth, George. Pro-fessor Dr. John Zietlow, your assistance with financial formulas wasvery helpful to me in this assignment. Your depth of knowledge infinance is amazing. You reflect a spiritual light, encouraging me andmany others.

Further praise goes to Scott Marcouiller. I am indebted to you,Scott, for conducting the book’s compliance review. Thank you for sift-ing through each page for accuracy and advice. In you, our firm has avaluable resource. Thanks a bunch! A special thanks to Julia Ormondfor your assistance in programming my Cap-Weighted Volume for-mula into Stockfinder. My appreciation to Dr. Dennis Hensley, JeffreyNeuenschwander, and Jacqueline Ramey for your exceptional andexhaustive editorial assistance. A big thank you to my good buddy,Pep, for designing the book’s website: www.volumeanalysis.com.Great work!

A tip of the hat to three former MTA (Market Technicians Asso-ciation) presidents who conducted the book’s primary peer review:

www.volumeanalysis.com

Ralph Acampora, Larry M. Berman, and Philip M. Roth. Thank youfor volunteering to peer review this work. I know none you had thetime to do it, but nonetheless you did it anyway. When I asked foryour help in conducting the review, I really did not know what toexpect as you are all among the most accomplished and respectedtechnicians. Thank you for your insights, kind words, and encourage-ment. Your personal dedication to the elevation of our profession issomething to be very much admired.

My sincere appreciation to my team who picked up the slackwhile I was hidden away writing. Laura Rowe, thank you for being myassistant, but you are so much more than that. Not only are you won-derful with everyone, especially our clients, but you also do a fantasticjob keeping me organized. Dad, thank you for teaching me the busi-ness. You are the most honest, sincere man one could hope to knowand be privileged to work with. Thank you for being my father.

I spent much time researching and writing this book. However, itwas not really my time to spend; it was my families’ time. So this bookis dedicated to my family. Speaking of which, I want to thank thesweetest person I’ve ever met—my wife, Kathy. Marrying you wasabsolutely the wisest thing I’ve ever done. Our marriage is the great-est earthly blessing God could ever bestow upon me. You are wonder-ful, amazing, and incredibly beautiful. I could never reach my goalswithout you, nor would I want to without your support, my Love. Ilove you, Beautiful! To my sister Tiffany, thank you for your selflessact and commitment to our family. Your gift to us is hope, love, andlife. We are forever grateful and indebted to you.

This book is much about price and value. I assert an item’s valueor worth is ultimately determined by the price someone else is willingto pay for it. With this in mind, there could be nothing more valuablethan one’s soul. And what is the value of the soul? Pondering thisquestion, I am so utterly grateful to my Good Sheppard, who in love,ransomed His life, redeeming this unworthy soul. Blessed be thename of God for ever and ever, for wisdom and might are His. Hechanges the times and the seasons. He removes kings and sets upkings. He gives wisdom unto the wise and knowledge to them thatknow understanding. He reveals the deep and secret things. Heknows what is in the darkness, and the light dwells with Him. I thankthee and give You my praise.

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About the Author

Armed with proprietary indicators and investment programs,Buff Pelz Dormeier, CMT dynamically manages private invest-ment portfolios for affluent individuals, institutions, trusts, andendowments. Buff builds customized strategies designed to meet orexceed a client’s specific investment objectives in what is often uncer-tain market conditions. This is accomplished by utilizing proprietarystate-of-the-art portfolio management tools designed to grow andpreserve wealth in a risk-conscience manner.

In Buff’s 15+ years in the securities industry, he has beenemployed as a financial advisor, an analyst, and a portfolio manager.An award-winning industry innovator, Buff is the developer of Vol-ume Weighted Moving Averages (VWMA), the VW-MACD, the Vol-ume Price Confirmation Indicator (VPCI), VPCI Stochastics, theAnti-Volume Stop Loss (AVSL), the Trend Thrust Indicator (TTI),Capital Weighted Volume Indexes, and a host of cap-weighted, volume-based breadth indicators.

As a celebrated source of investment knowledge, Buff’s work withmarket indicators and trading system design has been publishedand/or referenced in Barron’s, Stock’s & Commodities, SFO andActive Trader magazines, and the IFTA & MTA Journals. A Char-tered Market Technician, Buff received the 2006 Charles Dow Awardrecognizing research papers breaking new ground or which makeinnovative use of established techniques in the field of technicalanalysis. The Charles H. Dow Award is considered one of the mostimportant recognitions in the field of technical analysis. He has alsobeen a featured speaker at national and international conferencesincluding Expo Trader Brazil, the TradeStation World Conference,and the Moneyshow International Trader’s Expo.

Buff was a double major graduate of Indiana State University par-ticipating in varsity track and cross country as a student athlete. Stillan avid runner, Buff is a former Indiana Marathon champion.

xviii INVESTING WITH VOLUME ANALYSIS

Presently, Buff is a member of the Markets Technician Association,Emmanuel Community Church, and he is an executive board mem-ber of the Inter-Faith Hospitality Network of Greater Fort Wayne.

Introduction

Do you believe navigating the markets in the coming decades will beas easy as it was in the 1980s and 1990s? If not, perhaps you shouldconsider sharpening your investment skills with technical analysis,specifically volume analysis.

My exposure to technical analysis began early in my career as afinancial advisor. Like in most major brokerage firms, my firm’ssquawk box reported various stock stories from the market analysts.These stock stories would make a case for why a particular companywas undervalued, overlooked, or discounted relative to some futuredevelopment or innovation. The best of these stories would berelayed to retail clients, who would invest in the stock of the compa-nies featured in the stories. Occasionally, some of these stories cametrue, and the stock increased in value. Other times, the stock had tobe relegated to the long-term holdings file while investors with losseswaited until the company or industry group moved back into favor.Unfortunately, although many of these stories originally soundedpromising, they ended up being nothing more than hyped-up fairytales told by supposed Wall Street geniuses.

Fortunately, one analyst was different from all the others. Hisrecommendations came without flashy stories. Speaking in terms oftrend, support, resistance, patterns, breakouts, and risk management,his recommendations often showed profits immediately. When theydid not, he would quickly admit his mistake, something unheard ofamong market analysts. His approach allowed investors to preservetheir capital for the next investment opportunity. What was the differ-ence between this analyst and the others? He was not a CharteredFinancial Analyst (CFA), but he was a Chartered Market Technician

1

2 INVESTING WITH VOLUME ANALYSIS

(CMT)—a technical analyst. I was so impressed by his technicalapproach that I pursued my own CMT designation.

So, what is technical analysis? Market analysis breaks down into twobasic schools of thought: fundamental analysis and technical analysis.Assuming value is the sole determinant of price, fundamental analysisattempts to determine intrinsic value. The fundamental analyst collects,analyzes, and models information about a company, including earnings,assets, liabilities, sales, and revenue. Fundamental analysts embrace ascore beliefs that the markets are inefficient, all necessary information isavailable to the public, and valuation is quantifiable. Fundamental ana-lysts are concerned with how value is reflected within price. However,the fundamental approach cannot tell its practitioners when to buy orsell. For example, in 2000, Cisco Systems was Wall Street’s darling. Noone needed to look far to find many fundamental “buy” ratings on thestock. Yet, an investor who purchased Cisco on January 1, 2000, andheld it until January 1, 2002, would have experienced a 65 percent loss.On the other hand, an investor who bought Cisco on January 1, 1998,and held it until January 1, 2000, would have experienced a 64 percentgain. Any investor with just a bit of experience investing during the pastdecade could list many more such examples. Timing represents a seri-ous limitation to the fundamental approach in an investment strategy.

The technical analyst acknowledges that fundamental analysis playsa prominent role in security analysis. However, the technical analystbelieves that price is ultimately the end result of the battle between theforces of supply and demand. Price represents all that is known, feared,and hoped for by the market. Technical analysis focuses on the forcesbehind supply and demand that produce price. Technical analysts holdas core beliefs that the markets are efficient at discounting even futuredevelopments, prices move in trends that can be forecast (up, down,and sideways), investors are both logical and emotional creatures, andhistory repeats itself—more so after it has been forgotten.

Hundreds of millions of dollars are poured into fundamentalresearch by brokerage firms, mutual fund companies, hedge funds,and advisory services, all in an effort to determine their proper intrin-sic value. With all this money invested in research, one would pre-sume that an informed investor should know the worth of a givensecurity. Yet, wide and violent price swings are still as prevalent as

INTRODUCTION 3

ever. Why? Perhaps because the fundamental information ignores thehuman element. And it is in the human mind, not theoretical models,that price is ultimately determined. For example, a fundamental ana-lyst might perform a great amount of research to determine possibleresults of an important announcement. The data is the critical infor-mation. In contrast, the technical analyst focuses his or her forecaston how the market participants react after the data is released. Thedatum themselves are inconsequential relative to the importance ofpredetermining investor expectations.

A technical analyst studies four major areas: sentiment, cycles,price, and volume. Sentiment indicators monitor market participants.Insiders, specialists, and institutions generally are regarded as havingsuperior or leading opinions, whereas advisory services, journalists,and small traders usually are seen as having stale news or inferioropinions. Cycle analysis is the study of time—the order, length, andrecurrences of market trends. The preponderance of technical analy-sis involves price and chart analysis. The price chart represents theactions and behavioral patterns of investors—the market’s testimony.Price testifies to what investors believe and how strongly they believeit. However, if price is the market’s testimony, volume is the market’spolygraph. As a stock rises, more and more investors should beattracted to participate in the stock’s move. However, if fewer andfewer investors are willing to participate as the stock price continuesto rise, then the volume contradicts the price movement. In this way,volume substantiates price by measuring the force and extent ofinvestor convictions. When volume increases, it confirms price move-ments; when volume decreases, it contradicts price movements.

Therefore, volume analysis is a quest for truth in an otherwisescrambled investment puzzle. To solve any puzzle, it helps to look atthe puzzle’s box cover to form a perspective of the image. In volumeanalysis, volume is the box cover that enables us to view the marketsthrough the lens of supply and demand. Like other skills, volumeanalysis is as of much an art than an exact science. And like mostskills, a little knowledge without application experience could domore harm than good. Volume analysis is no different. It deals withprobabilities; it leaves room for unfavorable outcomes because manyfactors can affect future price movements. Investors employing


volume analysis should also apply a strict and rigorous, unemotionaldiscipline to encourage long-term success. Fortunately, in volumeanalysis, it is not necessary to wait for the outcome of often alreadydated, stale fundamental figures or economic statistics to develop aninformed opinion. A disciplined and planned approach of analyzingmoving markets allows for decisive market action. Thus, as with fun-damental analysts, successful technical analysis depends on one’sability to execute and one’s ability to analyze and gauge the market.

Experience is the best teacher, but the market can charge somehefty tuition. However, the market need not be a closed-book test.We can also learn through sharing our knowledge and experiencewith one another other. This book shares with you what I havegleaned from my 15 years in the field of volume research. Theendeavors of Investing with Volume Analysis are to

• Equip the savvy investor with a foundational understanding ofthe market, its history, and its present structure.

• Present an enlightened perspective on the role of volume inthe markets, not only in terms of what may pragmatically workbut also in terms of apprehending the underlying rationale ofhow and why.

• Review many of the traditional volume indicators and intro-duce my own ground-breaking methodologies.

• Arm the investor with volume-based strategies for assessingrisk and gauging and tracking the market, similar to that of aGPS device.

Albert Einstein once said, “The essence of mathematics is not tomake simple things complicated but to make complicated things sim-ple.” With this thought in mind, the essence of this book is to conveyadvanced technical concepts in an easily understood manner. Assuch, this book starts with the basics, and then rapidly builds on theseessential concepts. For those seeking further information, includingwhere to find many of indicators and new developments discussed inthe forthcoming pages, go to www.VolumeAnalysis.com.

www.VolumeAnalysis.com

Two Perspectives of Market Analysis

“This is one of the most important points I’ve had to learn.For me, at least, ‘why’ is the most expensive and least valu-able information. When you get ‘why’ wrong (and act accord-ingly), you lose lots of money. You only can know ‘why’ forsure after the fact (when it is useless). You gotta learn to livewith the reality that there are things that are beyond the indi-vidual’s ken. The search for ‘why,’ whether right or wrong,can just as easily lead you to irrelevancies, or, worse yet, tovalid data that will not impact on the market. The best analogis arguing with your wife. Being right is often totally valuelessif not counterproductive.”

—Mike Epstein (1931–2009) Quoted on June 21, 2006

Building a Firm FoundationWe start our journey by getting acquainted with the basics, the

fundamentals of technical analysis. These fundamentals are so self-evident that they are often overlooked. However, a rock-solid founda-tion is critical to understanding the volume analysis perspective. Yourability to succeed ultimately depends on your ability to discern. Everyday, causal investors attempt to employ complicated indicators in theiranalyses of the market and individual securities; however, they gener-ally do not fully understand what information the indicators aredesigned to reveal. When the markets turn and investors’ indicators nolonger work, they’re at a loss.

Even when these investors experience short-term success, theyare often building on sand because blind success reinforces poor

1

5


practices. The difference between being wise and foolish is neitherinformation nor intellect, but a depth of understanding. A thoroughunderstanding of the basics enables investors to develop the neces-sary perspectives to build a cause for action. Building a cause foraction is what analysis is all about.

As one of these investors yourself, a solid understanding of thebasics is the bedrock that builds your perspective, shapes your beliefs,and influences your ideas. You can either seek to build a perspectiveon a solid foundation or be consumed with the moment—continuallyseeking the hottest tip, trying out the latest indicator, or readingabout the newest five-step program to success. You can continuesearching for the Holy Grail of market success or you can develop theunderstanding required to start believing in your own ability to dis-cern, and thereby, gauge the market.

Two Legitimate Approaches

“It is the glory of God to conceal a thing, but the honor ofkings is to search out a matter.”

—King Solomon

There are many forms of security analysis on which to build anunderstanding. The two most common methods of analysis are thefundamental analysis and the technical analysis. Acknowledging thesetwo approaches, the Financial Industry Regulatory Authority(FINRA) recognizes two types of research analysts: the CharteredFinancial Analyst (CFA) and the Chartered Market Technician(CMT). Although the two schools of research may be used togethereffectively, they stem from vastly different perspectives. Your per-spective of the market, what it is and how it works, plays a major rolein your investment success.

Early in my career, while studying for my CMT designation, Itaught technical analysis to many of the top brokers at the major bro-kerage firm where I was employed. A colleague who was part of theCFA program taught fundamental analysis. I once spent a day monitor-ing his crash course on fundamental analysis. His explanation of usingfinancial ratios to assess the value of companies made sense. Despite

CHAPTER 1 • TWO PERSPECTIVES OF MARKET ANALYSIS 7

my early concerns about fundamental analysis, formed from pastunproductive experiences and my preconceived beliefs regarding theefficiencies of the markets’ discounting mechanism, I was intrigued.

Like many fundamental analysts, the presenter had his favoritestock. He provided seemingly convincing reasons for why this stockwas overlooked and undervalued in relation to earnings, the industry,and other comparative valuations. According to his analysis, the stockwas intrinsically worth $6, although it traded slightly below $3. At $3,it was a cheap stock, so I inserted the symbol into my quote machinejust to keep an occasional eye on it. Several days and weeks thatturned into several months went by, and the stock did nothing buttrade in a tight sideways channel despite the broader market beingstrongly bullish. One day, however, the stock broke through its long-standing resistance at a little over $3. I pulled it up. It had developeda huge base and was breaking out on strong volume. I bought it. In ashort time, the stock ran up close to $6 and then began to wane. I soldpart of my position and put a limit order in just below the round num-ber of $6 to sell the rest based on some technical considerations. The$6 was the same price level the fundamentalist had estimated as fairvalue. I watched the stock closely and prepared to change the limitorder to market if it showed further weakness. However, my orderfilled as the stock moved a bit over $6. It was at this time that I firstrealized that the fundamentals were indeed most likely wagging thedog, suggesting that the fundamentals were driving the technicalaspects.

Believing I was bearing an olive branch, I sought out my new fun-damental ally to point out that he was right and thank him for helpingme make a buck. I even made a point to mention that he hadbought the stock at a lower price than I had while I intentionallyneglected that he had been sitting on dead money for over a year.Meanwhile, I had enjoyed participating in numerous stock issuesthroughout the bull market. However, I was floored when he told mehe had not sold the stock. Based on revised data, he now saw the stockfairly valued at $9. I tried to inform him that the stock appeared to beweakening technically and perhaps he should sell part of it while hehad a double in hand. No, he was far too excited. He proceeded to listmany more reasons why the stock was still undervalued. As a staunchtechnician, those details were just not important to me. As he went on,


I listened politely while deliberately blocking out his arguments forfear that it might influence my own objectivity. The stock went backdown to its former base at $3 faster than it rose. I felt really bad for theguy. He had finally gotten it right, and yet he had missed it! Howcould I face him again? I thought I might repurchase some shareswith my profits as the stock met support at $3, just so misery mighthave some company. But, nah, I would just be wasting my good capi-tal on bad assets. What kind of example would that be for my stock-broker students?

This anecdote shows that my colleague and I each had our ownperspectives of the market. The fundamentalist viewed stocks ascompanies in which he could become part owner. He believed hisfavored company was worth significantly more than the market price,so he bought it. This perspective of the market springs from what iscalled fundamental analysis. My view of the market is that stocks areshares of companies. These shares go up because eager buyers pushthem up, and they go down because fervent sellers sell, forcing themdown. When I saw a stock that had previously gone nowhere sud-denly pop up, I concluded the force of buying pressure could propelthe stock further, and I bought it. Our different investmentapproaches did not reflect a difference in intelligence, but they didreflect a difference in our perspectives. Fundamental analysis is pri-marily about the “what,” whereas technical analysis is much about the“when.” Rather than being pitted against each other, technical andfundamental analysis can be used to complement each other. Withthat clearly stated, Investing with Volume Analysis introduces you toa perspective of market analysis based on the principles of supply anddemand. In security analysis, this perspective is technical analysis.

The Fundamental ApproachFundamental analysis presumes security prices are based on the

intrinsic value of the underlying company. Price is formed based onthese values and facts surrounding the company. Seemingly, this is ahighly logical approach, one that many assume is correct in mostmarkets most of the time. The fundamentalist believes that with


time, stocks will move up to minimize the disparity between theirpresent value and their perceived intrinsic value. Thus, fundamentalanalysis presumes the future prospects of a security are best ana-lyzed through a proper assessment of the intrinsic value of theunderlying company.

Fundamental analysis is not concerned with the behavior ofinvestors as measured through the stock price or trading volume.Rather, the pure fundamental analyst’s focus is on finding the trueworth of the underlying company. In pursuit of value, the fundamen-talist collects, analyzes, and models company information, includingearnings, assets, liabilities, sales, revenue, and other informationrequired to evaluate the company. Assumptions of the fundamentalistinclude a belief that markets are not completely efficient and that allnecessary information is available to the public, but the company maynot always be efficiently priced. Overall, fundamentalists are con-cerned with what the price should be according to their valuationmodels. The determination of value from the collective action ofthese fundamentalist investors is the primary force moving today’smarkets.

The Technical ApproachWhile fundamental analysis focuses on the investment’s intrinsic

value, technical analysis is the study of the market through its cre-ators, the investors. Therefore, the focus of technical analysis is thebehavior and motivations of investors observed primarily throughtheir own actions. It is imperfect people who determine marketprices, not highly perfected valuation models. However, the techni-cian does not deny that the pursuit of value is a primary source ofmarket movement. Yet, the technical perspective deems that marketprice is formed by the collective opinions of market participants pur-suing value. Thus, in the mind of a technician, price is less about com-pany facts and more about investors’ feelings and perceptionsconcerning those facts.

In the exchange markets, prices are determined by what one partyis willing to pay and another is willing to accept. Therefore, price is


ultimately the end result of a battle between the forces of supply anddemand, manifested through the actions and behaviors of investors.Price represents all that is known, feared, and hoped for by the market.It is through the diagnostics of price, volume, and other technical met-rics formed by the actions and sentiments of market participants thatthe technician gauges stock performance.

Technical analysis assumes that market participants are efficientin price formation, thus avoiding any judgments about the intrinsicvalue of the underlying company. Therefore, the technician is notconcerned with what the ideal price should be; rather, he is concernedjust with what it is. Consequently, the company or any dataset used todetermine the company’s value is not the pure technician’s direct con-cern. The technician’s objective is to develop an understanding of thebehavioral forces producing price (such as supply and demand). Thecore aspects of the technician include believing that the markets areefficient at discounting even future developments, price movesthrough trends, investors are both logical and emotional creatures,and past behaviors tend to repeat themselves more so when enoughtime has elapsed that the behaviors have been forgotten.

Driving a Comparison BetweenFundamental and Technical Analysis

The movie Vantage Point begins by playing out the same sceneover and over again, each time from a different vantage point as expe-rienced by each major character. From such a portrayal or depiction,the viewer can easily see that one’s vantage point largely influencesone’s perspective. Likewise, the fundamentalist and the technicianhave similar objectives in analyzing securities. Their views are, how-ever, developed from different vantage points. An analogy can bedrawn between a fundamentalist and a technician who both examinea high-performance automobile. The fundamentalist looks under thehood, kicks the tires, and inspects the frame—the physical aspects ofthe car. The technician does not look under the hood. Rather, he eval-uates how the car performs under a set of conditions, such as turning,accelerating, and shifting. The fundamentalist examining the engine


notices a potential flaw in the engine design. Similarly, when thegauges exceed the threshold of the expected parameters, the techni-cian is led to the same conclusion as the fundamentalist, but withouta physical inspection of the engine.

A fundamentalist might identify a good valuation point of a stockbased on his analysis of the company. The technician observing theactions of market participants through the stock’s movements mightidentify the same price level as a potential support level. What is sup-port? Support is demand (buyers). So where does this demand comefrom? Often, it originates from the fundamentalist’s determination ofvalue. In this way, the two perspectives often yield the same conclu-sion using different methodologies. One opinion is based on thesearch for intrinsic value, whereas the other is shaped by extrinsicbehavior.

Whatever one’s vantage point, price goes up for only one reason:Demand has surpassed available supply. When the available supplyoutweighs demand, the price must go back down. Volume is the scaleweighing these forces of supply and demand that produce price. Inthis way, volume ultimately reflects the ebb and flow of money intoand out of the market or the security. Therefore, my belief is that vol-ume analysis provides a superior view of the market’s internal struc-ture that other forms of analysis do not offer. This book explores themarket from this underemployed perspective of volume analysis, pro-viding an investor with the tools and concepts to advance his or herown abilities in evaluating the market.

INDEXAABC of Stock Speculation, The, 16Acampora, Ralph, 21, 83accumulation

distribution, 133interday volume indicators, 127-139prices based on volume indicators,

147-150volume, 121

actions, reaction, 50addition, 218advance-decline lines, 215, 223Advanced Trading, 301allocation, dynamic asset, 248-251alphabet, markets, 54Alphier, James E., 128Altaira Investment Solutions, 83American International Group, 229American markets, history of, 15American Statistical Association, 127Amsterdam exchange, 14analysis. See also studies

closing prices, 58-59comparisons of fundamental/

technical, 10-11fear and greed, 56-57fundamentals of, 5-6, 8, 11index analysis alternatives, 231markets, 53-70

modern techniques of, 22-24sectors, 265volume, 33-34

patterns, 93-94prices, 27-31, 55-58technical, 9-10, 13-14, 30trends, identifying, 73-74volume. See volume, analysis

Anti-Volume Stop Loss (AVSL), 253, 256

324

Appel, George, 169applying

Volume Price ConfirmationIndicator (VPCI), 185, 188, 192-193, 204

volume-based strategies, 260arbitrage, 284Arms, Richard, 142-144, 218, 220-222Arms index (TRIN), 220, 222ascending triangles, 99-100assets, dynamic allocation of, 248-251Association for Investment Manage-

ment and Research (AIMR), 23ATS (Alternative Trading System), 286Average Directional Index (ADX), 199averages

moving, 119volume, 33volume-weighted average price

(VWAP), 152Volume-weighted Moving Averages

(VWMA), 160-164, 168-171Ayers, Leonard P., 17, 213

BB = S = T formula, 42-43Babylonian charts, 14Balance of Power (BOP), 155bands, volume, 120Bank of America, 229Barron, Clarence W., 17Barron’s magazine, 17, 214bars

downtrends, 74prices, 28, 54-55, 58-60volume, 54-55

Bear Stearns, 300bearish markets

diamond top patterns, 103head-and-shoulders patterns, 105

INDEX 325

high volume with low stockappreciation, 65-67

inverted head-and-shoulderspatterns, 106

low volume with high stockappreciation, 63-65

behaviors, observing, 57Better Trading Through Effective

Volume, 156bid-ask spreads, calculating, 295bid-offer premise, 14Birinyi, Laszlo, 154block trades, 24Bloomberg, 300Bollinger, John, 169, 254Bollinger Bands, 121, 186-188, 254Bollinger on Bollinger Bands, 169bonds, 12. See also investmentsBostian, David, 133bottoms, rounding, 101-102breadth

markets, 262, 265, 268indicators, 209-225

breakdowns, 96breakouts, 95-96broadening patterns, 97-98Brown, Stephen J., 25Buff Averages, 161Buff Spreads, 172Buffett, Warren, 34building MPS maps, 269Bulkowski, Thomas, 97bullish markets

cup-and-handle patterns, 104flags, 108-110high volume with high stock

appreciation, 61-63indexes, 149

buying, pressure, 52

CC (close), 60calculations

of average Buff Spreads, 172bid-ask spreads, 295Volume Price Confirmation

Indicator (VPCI), 183-184Volume-weighted Moving Averages

(VWMA), 162calendar tax years, trends, 91Can Stock Market Forecasters

Forecast?, 21capital weighted volume, 226

cap-weighted volume, 232, 235, 238-239

credit crisis of 2008, 229-231index volume analysis alternatives, 231price volume relationship

disconnects, 227capitalization, 227Carder, John A., 220Castaing, John, 14cause and effect, volume, 37CFA (Chartered Financial Analyst), 6CFA Institute, 23CFP Board’s Code of Ethics, 244Chaikin, Marc, 133Chaikin’s Money Flow, 136change, 30channels, 94-95Chartered Financial Analyst (CFA), 6Chartered Market Technician

(CMT), 6Charting the Market television

show, 224charts

Babylonian, 14Crocker, 124equivolume, 142-144point and figure, 55trends, drawing trend lines, 74-76volume, 119

Cisco, 245Citigroup, 229Clay, Paul, 127closing prices, 29, 58-59CMT (Chartered Market

Technician), 6CMT of Miller Tabak + Co. LLC., 283Cobb, Ty, 258Coca-Cola, 254coffee shops, stock trading in early

European markets, 14Columbia University, 20combinations, plot, 94-103commissions, 285commodities, Babylonian charts, 14companies, determination of value, 10comparisons

between fundamental/technicalanalysis, 10-11

traditional volume to cap-weightedvolume, 234-235

Volume Price ConfirmationIndicator (VPCI) to otherindicators, 198, 202

competition, 303compounding, power of, 252computers, statistical arbitrage, 284

326 INDEX

conditions for Market FacilitationIndex (MFI), 141

confirmationprice-volume, 113Volume Price Confirmation

Indicator (VPCI), 183-204Confusion de Confusiones, 14contradictions

price-volume, 113Wyckoff’s law, 85

Convergence, Volume-WeightedMoving Average ConvergenceDivergence, 169-171

convictions, volume, 35countertrends, 108Course of the Exchange and Other

Things, The, 14Cowles, Alfred, 20credit crisis of 2008, 229-231Crocker, Benjamin, 124cumulative sums, 218cumulative volume, 127cup-and-handle patterns, 104curve-fittings, 116. See also indicatorsCustomers’ Afternoon Letter, 16

DDaily Trading Barometer, The, 130Daily Volume Indicator, 133Dalton, James, 35Dalton, Robert, 35dark pools, 289-293, 302day-to-day (or bar-to-bar)

measurements, 145de la Vega, Joseph, 14decimalization, 215, 303declines, 215decoding price with volume, 59demand, 36, 260-268

actions and reactions, 50lines, 44opportunity cost models, 51strong demand phase, 79supply and, 11weak demand phase, 79

deregulation of commissions, 285descending triangles, 100Desmond, Paul F., 217diamond top patterns, 103direction of trends, 261, 279disconnects, relationships, 227disparity of opinions, volume, 36displaying volume bars below price

bars, 118

dissemination of information, 35distribution

accumulation, 133Money Flow, 154

Divergence, Volume-WeightedMoving Average ConvergenceDivergence, 169-171

diversification, 251. See also riskdividend weighting, 227DJIA (Dow Jones Industrial

Average), 16, 213, 220Dodd, David, 19dollar volume, 33Domowitz, Ian, 301Donaldson & Lufkin seminar (1976), 22doubt, 96Dow Jones Corporation, 17Dow Jones Industrial Average

(DJIA), 16, 213, 220Dow Jones Transportation Average, 16Dow Theory, 16-17, 20, 24, 26Dow Theory Comment, 17Dow, Charles H., 15-16, 24, 38, 49,

77, 176down volume, 127downtrends, 42, 45, 76. See also trendsdynamic asset allocation, 248-251Dysart, Jr., Paul F., 219Dysart, Paul L., 147

E–Fease of movement, 144-145economy, growth of, 283Edwards, Robert, 18, 19Efficient Market Theory, 20efforts versus results, law of, 87emotions, analyzing, 57equal weighting, 227equilibrium, markets, 277-279equity markets, 283. See also marketsequivolume charts, 142, 144European markets, early (1690s), 14evaluation, state of trends, 77-78exchange markets, determination of

prices, 9exchange-traded funds (ETFs), 232,

245, 283, 303exponential moving averages (EMAs),

131, 223extremes

price volume, 277Volume Price Confirmation

Indicator (VPCI), 186Exxon, 229

INDEX 327

fallingresistance, 96-97, 100support, 42, 97-98

Fannie Mae, 229fear, analyzing, 56-57fill or killed orders, 12-13Financial Industry Regulatory

Authority (FINRA), 6, 287First Law of Motion, 46flags, bullish markets, 108-110Flash Crash (2010), 24, 236-238,

281, 300flash trading, 291flickering, quotes, 291flipping, 304float, 33Forbes magazine, 18force, 43-44, 47-49forecasting, 20, 128, 260formations

countertrends, 108pennant, 108-110

formulasB = S = T, 42-43on-balance volume (OBV), 128Williams’ Accumulation Distribution

(WAD), 135Williams’ Variable Accumulation

Distribution (WVAD), 133Fosback, Norman G., 147, 219401(k) plans, 283Fountain of Gold, The, 15Freddie Mac, 229frequency, high-frequency trading,

287-293fundamentals

analysis, 5-11history of, 19-22prices, 28. See also prices

G–Hgaming, 291gaps, 69Gartley, Harold, 214Gire, Paul J., 244Goetzmann, William N., 25Gould, Jr., Edson B., 127, 130Graham, Benjamin, 19, 22, 34Granville, Joseph E., 128, 132, 139, 223Granville’s New Key to Stock Market

Profits, 128Great Market Crash of ’29, 18, 21greed, analyzing, 56-57

growthof economy, 283of pessimism, 76of volume, 282-291, 293

H (high), 60H.W. Poor Company, 17Hamilton, William Peter, 17-25hands, strong/weak, 86Haurlan, Peter N., 223head-and-shoulders patterns, 105Healy, Patrick, 300high ease of movement, 145high-frequency trading, 287-293high prices, 29high volume

with high stock appreciation, 61-63with low stock appreciation, 63-65with low stock depreciation, 65-67

“The High Volume ReturnPremium,” 39

“The High Volume Return Premiumand the Investor RecognitionHypothesis: International Evidenceand Determinants,” 40

historyCharles H. Dow, 15-16of fundamentals, 19-22of indexes, 16of investments, 12-15of markets, 293-302on-balance volume (OBV), 128William Peter Hamilton, 17

holiday trends, 91-92Homma, Munehisa, 15horizontal resistance, 99-100horizontal support, 100How to Chart Your Way to Stock

Market Profits, 130

Iidentifying trends, 73-74index funds, 245indexes

analysis alternatives, 231ARM (TRIN), 220, 222history of, 16Intraday Intensity Index, 133Money Flow Index, 158-159Negative Volume Index (NVI),

147-148Positive Volume Index (PVI), 147-148S&P 500, 215, 269Trend Thrust Indicator Index

(TTI), 269volume, 33

328 INDEX

indications of interest (IOI), 286indicators

breadth, 209-225interday volume accumulation,

127-131intraday volume accumulation,

132-139Money Flow, 153-156Moving Average Convergence

Divergence (MACD), 169on-balance volume (OBV), 128-129price range volume, 140-146pure volume, 118-124tick-based volume, 151-156Trend Thrust Indicator (TTI), 171-174volume, 114-117, 147-150Volume Price Confirmation

Indicator (VPCI), 183-204volume-price trend (VPT), 130-131volume-weighted price, 157-159,

164-175, 177-181individual stock selection, 268inflation, 282information, dissemination of, 35inside days, 70interday volume accumulation

indicators, 127-131intermediate-term trends, 75Intraday Intensity Index, 133intraday volume accumulation

indicators, 132-139inverted head-and-shoulders

patterns, 106investments

Babylonian charts, 14Charles H. Dow, 15-16early American markets, 15early European markets, 14early Japanese markets, 14history of, 12-13prices, 28. See also pricesrisk strategies. See strategies, riskvolume as a market force, 39

Investor Business Daily (IBD), 137

J–K–LJapanese markets, early (1700s), 14Jensen’s Measure, 25Jonathan’s Coffee House, 14Jones, Edward, 16Jones, Eric, 35Journal of Finance, 41

Khalil, Waleed Aly, 130Kumar, Alok, 25

L (low), 60languages, 54-55large caps stocks, 212laws

of cause and effect, 52of effort versus result, 47of motion, 46, 51-52volume, 85-88, 91

left shoulders, 106Lincoln, Abraham, 257lines

advance-decline, 215, 223demand, 44signal, 172trends, drawing, 74-76Up–Down Volume Line, 217

liquiditymeasurements, 297volume, 35

Livermore, Jesse, 17logs, 218London Stock Exchange, 14low prices, 29Lowery Research Corporation, 217

MMagazine of Wall Street, The, 18, 20Magee, John, 18, 21Managed Funds Association, 301maps, building MPS, 269Market Break, 301Market Facilitation Index (MFI),

141-142“Market Statistics and Technical

Analysis: The Role of Volume,” 41Market Technician’s Association. See

MTAmarkets

analysis, 22-24, 53-70B = S = T formula, 41-43breadth, 262, 265, 268

indicators, 209, 219-225reliability of, 214-218as a resource, 211-213statistics, 209-210

cup-and-handle patterns, 104diamond top patterns, 103early American, 15early European, 14early Japanese, 14equilibrium, 277-279exchange, determination of prices, 9flags, 108-110head-and-shoulders patterns, 105history of, 293-302

INDEX 329

indexes, 149inverted head-and-shoulders

patterns, 106prices, 28. See also pricesregulation, 23-24risk strategies. See strategies, risksectors, 265-266structures, changes in, 302trends, identifying, 73-74volume, 33-37

Markowitz, Harry, 247Markstein, David L., 130McClellan, Marian, 223McClellan, Sherman, 223McClellan, Tom, 215-218McClellan oscillator, 223-225, 238McDonald’s, 248McGinley, John R., 222measurements

liquidity, 297types of indicators, 114-117volume, 112-113

Mehta, Nina, 300methods of security analysis, 6-8Miles, Jonathon, 14Mind over Markets, 35Missing the Ten Best, 244modern market structure, 294-301money

management, 251velocity of, 34

Money Flow, 133, 153-154, 156Money Flow Index, 158-159Money Stream, 155Moody’s Investors Services, 127Morgan, Gene, 224motion, 46, 51-52movement

markets, analyzing, 59prices, 51

Moving Average ConvergenceDivergence (MACD), 169-173, 177-181

moving averages, 119, 218Volume-Weighted Moving

Average Convergence Divergence(VW-MACD), 169, 171

Volume-weighted Moving Averages(VWMA), 160-168

MPS (market positioning system)maps, building, 263-264, 269

MTA (Market Technician’sAssociation), 22

mutual funds, 283. See also bonds;investments; stocks

NNASDAQ, 215

Nasdaq Composite, 213Nasdaq Stock Market, 303

National Market System (NMS), 286necklines, 106Negative Money Flow, 158Negative Volume Index (NVI),

147-148, 219Nelson, Samuel A., 16New York Stock Exchange (NYSE),

16, 215, 282, 303New York Times, The, 18New York University Stern School of

Business, 25NMS (National Market System), 286Nobel Prize in economics, 247nonexchange markets, 286nontrending price patterns, 129normalized volume (%V), 120NYSE (New York Stock Exchange),

16, 215, 282, 303NYSE Amex (formerly the American

Stock Exchange), 303NYSE Arca (formerly the

Archipelago ECN), 303

O–PO (opening), 60on-balance volume (OBV), 128-129open competition, 303opening values, 28optimization, 116-117oscillators, 218

intraday volume accumulation, 136-139

McClellan, 223-225, 238volume, 120volume zone oscillator (VZO), 130

outside days, 71

parallel support and resistance, 94patterns, 51

analyzing, 93-94bullish flags and pennant

formations, 108-110countertrends, 108cup-and-handle, 104diamond top, 103head-and-shoulders, 105inverted head-and-shoulders, 106plot combinations, 94-103

Patterns For Profit, 224pennant formations, 108-110pessimism, growth of, 76

330 INDEX

phases of volume analysis, 78, 270-276, 280strong demand, 79strong supply, 80-82weak demand, 79weak supply, 82-83

plotscombinations, 94-103countertrends, 108

point and figure charts, 55Poor, H.V., 17portfolio managers, 251Positive Money Flow, 158Positive Volume Index (PVI),

147-148, 219power of compounding, 252price-volume confirmation/

contradiction, 113prices

accumulation based on volumeindicators, 147-150

analysis, 27-31, 55-59bars, 28, 54-55, 58-60channels, 95closing, 29determination of, 9high, 29low, 29motion, 47movement, 51range volume indicators, 140-146trends, 44as truth (volume), 37validation of, 34velocity, 38volume, 32

extremes, 277interpreting, 40-41leading, 39-40relationship disconnects, 227

Volume Price ConfirmationIndicator (VPCI), 183-204

volume price-spread analysis, 61-71volume-weighted average price

(VWAP), 152volume-weighted price indicators,

157-159, 164-171, 175-181primary trends, 75profit

Volume Price ConfirmationIndicator (VPCI), 196, 198

volume-weighted price indicators,179-181

unity windows, 141pure volume indicators, 118-124

Q–RQuong, Gene, 158quotes, flickering, 291

railroads, Dow Jones TransportationAverage, 16

ranges, 30, 140-146ratios, 218reactions, actions, 50reading

price bars, 60the tape, 54, 57

Reagan, Ronald, 77real estate investment trusts

(REITS), 216RealMoney.com, 144reforms in 1934, 20Regulation NMS, 294regulations

growth of trading volume, changesin, 285-293

markets, 23-24relationships

disconnects, 227price-volume, 185

reliabilityof breadth indicators, 214-218volume, 303, 305Volume Price Confirmation

Indicator (VPCI), 197Volume-weighted Moving Averages

(VWMA), 164volume-weighted price indicators,

177-178resistance, 43-44

falling, 96-97, 100parallel support and, 94horizontal, 99-100rising, 97-98

resources, breadth indicators, 211-213responsiveness

Volume-weighted Moving Averages(VWMA), 163

volume-weighted price indicators,176-177

retirement plans, 283returns

Volume Price ConfirmationIndicator (VPCI), 196


revenue, 227reversal warnings, 65-67Rhea, Robert, 17

INDEX 331

right shoulders, 106rising

resistance, 97-98support, 44, 96-100

riskSharpe Ratio, 197strategies, 241-242

Anti-Volume Stop Loss (AVSL),253, 256

buy and hope, 245, 248dynamic asset allocation, 248-251errors, 256-258management, 244, 251

Volume Price ConfirmationIndicator (VPCI), 197


Rodney L. White Center forFinancial Research, The, 39

Roth, Philip J., 283rounding

bottoms, 101-102tops, 102-103

rules, volume, 85-91Russell, Richard, 223Ruth, Babe, 258

SS&P 500

Growth Index, 269index, 215Value Index, 269

Sandler, Doug, 249Schabacker, Richard W., 17-18Schade, Jr., George A., 219Schilling, Molly, 21A School Boy’s Faith, 128Schumer, Charles E., 287, 300seasonal trends, 91-92Second Law of Motion, 47Secret of Selecting Stocks for

Immediate and Substantial Gains,The, 133

sectors, markets, 265-266securities, fundamentals of analysis,

6-8Securities Exchange Act of 1934, 20Securities and Exchange Commission

(SEC), 20-21, 285Security Analysis, 19-20Security Information Processor

(SIP), 303Segal, Jeremy J., 245selection of individual stocks, 268selling, pressure, 52

sessions, trading, 33Sharpe Ratio, 25, 197short-term trends, 75signal lines, 172simple addition, 218Simple Moving Averages (SMAs), 183Smith, Adam, 50Soudack, Avrum, 158SP500, 213spreads

Buff Spread, 172volume, 59-71

Standard and Poor’s, 17Standard Statistics, 17statistical arbitrage, 284statistics, breadth indicators, 209-210stochastics, 218Stock and Commodities Magazine, 142Stock Market Barometer, The, 17Stock Market Logic, 147stocks, 7, 12. See also investments

fundamental analysis of, 7individual selection, 268large cap, 212risk strategies. See strategies, riskvolume, 32

Stocks for the Long Run, 245strategies

risk, 241-242Anti-Volume Stop Loss (AVSL),

253, 256buy and hope, 245, 248dynamic asset allocation, 248-251errors, 256-258management, 244, 251

volume, 259applying, 260MPS maps, 269phases of volume analysis,

270-276, 280supply and demand, 260-268

strongdemand phase, 79hands, 86supply phase, 80-82

studies, 174-176breadth indicators, 210Volume Price Confirmation

Indicator (VPCI), 194-198subtraction, 218summaries, Volume-weighted Moving

Averages (VWMA), 168supply, 260-268

and demand, 11opportunity cost models, 51

332 INDEX

strong supply phase, 80-82weak supply phase, 82-83

support, 43-44falling, 97-98horizontal, 100parallel, and resistance, 94rising, 96-100

surges, volume, 120sustainability of trends, 261-262symbols, 54-55symmetrical triangles, 96-97

TT.P. Donovan Investments, 169tape, reading the, 54, 57technical analysis, 9-10, 30

Babylonian charts, 14fill or be killed orders, 13

Technical Analysis and Stock MarketProfits, 19

Technical Analysis of Stock Trends,18-19

Technical Analysis of Stocks andCommodities, 158

Technically Speaking, 21TeleChart, 45terminology, volume, 33theories, 50

Dow Theory, 16-17, 20-26Efficient Market Theory, 20

Third Law of Motion, 50Tick Volume, 154tick-based volume indicators, 151-156Time-Segmented Volume, 155tops, rounding, 102-103total trades/volume, 33tracking zones, 271Trade Reporting Facilities (TRFs),

290, 304Tradestation, 44trading

block trades, 24flash, 291high-frequency, 287-293history of, 293-302total trades, 33volume, changes in, 281-293

Trading Chaos, 141Trading Classical Patterns, 97Trading with Equivolume at

RealMoney.com, 144transactions, 33. See also tradingTrend Thrust Indicator (TTI),

171-174, 269

trends, 44of accumulation and distribution, 51countertrends, 108determining type of, 74direction of, 261, 279downtrends, 42, 45identifying, 73-74lines, drawing, 74-76seasonal, 91-92state of, evaluating, 77-78sustainability, 261-262

trianglesascending, 99-100descending, 100symmetrical, 96-97

TRIN, 220, 222Twiggs, Colin, 137Twiggs’ Money Flow, 137

U–VU-shaped tails, 266uncertainty, 96uneventful nontrending price

patterns, 129up volume, 127, 211Up–Down Volume Line, 217uptrends, drawing, 75-76. See also

trendsupward breakouts, 95

validation of price, 34values

judgments of, 10opening, 28

vantage points, 10variable market-based insurance

products, 283VARSITI (Volume Adjusted Relative

Strength Increasing ThrustIndicator), 251

velocityof money, 34volume, 38

volume, 32accumulation, 121analysis, 43, 55-60

applying laws of motion to, 51-52

changes in, 302evaluating state of trends with,

77-78phases of, 78-83price-spread, 61-71

averages, 33B = S = T formula, 42-43

INDEX 333

bands, 120bars, 54-55capital weighted, 226-239cause and effect, 37convictions, 35cumulative, 127dark pools, 291-293disparity of opinions, 36dissemination of information, 35dollar, 33as fuel for markets, 36-37high volume, 61-67indexes, 33indicators, price accumulation based

on, 147-150interday accumulation indicators,

127-131intraday accumulation indicators,

132-139liquidity, 35low volume with high stock

appreciation, 63, 65as a market force, 39markets, 33-34measurements, 112-117motion, 47moving averages, 119oscillators, 120overview of, 33patterns, 93. See also patternsprices

extremes, 277interpreting, 40-41leading, 39-40range indicators, 140-146

pure indicators, 118-124reliability, 303-305rules and laws, 85-91strategies, 259-280Tick Volume, 154tick-based indicators, 151-156total, 33trading, changes in, 281-293trends, 73-78, 91-92truth (prices as), 37validation of price, 34velocity, 38

Volume Moving AverageConvergence Divergence (V-MACD), 120

volume multiplier (VM), 185%Volume Oscillator (%VO), 120

Volume Price Confirmation Indicator(VPCI), 183, 254applying, 185-193, 204calculations, 183-184comparing to other indicators, 198,

202studies, 194-198

volume-price trend (VPT), 130-131Volume Rate of Change (V-ROC), 120Volume-Weighted Average Pricing

(VWAP), 152, 298volume-weighted moving

average convergence divergence(VW-MACD), 169-171, 266

Volume-Weighted Moving Averages(VWMAs), 160-168, 183

volume-weighted price indicators,157-159, 164-181

volume zone oscillator (VZO), 130

W–ZWall Street Journal, The, 15, 38, 304Walters, Patricia D., 23warnings, reversal, 65-67weak

demand phase, 79hands, 86supply phase, 82-83

weighting, 227Wharton School, University of

Pennsylvania, 39Wilder, J, Welles, 134William, Pascal, 156Williams’ Accumulation Distribution

(WAD), 134Williams’ Variable Accumulation

Distribution (WVAD), 133Williams, Bill, 37, 140Williams, Larry, 133-134Worden, Don, 154Worden Brothers, Inc., 45, 154worms, 114Wright, Charley F., 142Wyckoff, Richard D., 17, 47, 37, 52Wyckoff’s law, 85

zonesresistance, 43support, 43tracking, 271

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