Investing With Volume Analysis

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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 withVolume Analysis

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Investing withVolume AnalysisIdentify, Follow, andProfit from TrendsBuff 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 publishing 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 professional 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 similar to the example presented. Investors should make their own decisions based on theirspecific investment objectives and financial circumstances. The material has been prepared 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 special sales. For more information, please contact U.S. Corporate and Government Sales, 1-800-3823419, corpsales@pearsontechgroup.com. For sales outside the U.S., please contact InternationalSales at international@pearson.com.Company 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 originalhardcover book.

ContentsIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Chapter 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 . . . . . . . . . . . . . . . . . . . . 10Chapter 2:The History of Technical Analysis . . . . . . . 12The First Recorded Investment—A Fill orBe Killed Order. . . . . . . . . . . . . . . . . . . . . . . . . .Babylonian Charts . . . . . . . . . . . . . . . . . . . . . . . .Early European Markets. . . . . . . . . . . . . . . . . . .Samurai Trading . . . . . . . . . . . . . . . . . . . . . . . . .Early American Market Analysis . . . . . . . . . . . .The Root—Charles H. Dow . . . . . . . . . . . . . . . .The Shoots—William Peter Hamilton andOther Dow Theorists . . . . . . . . . . . . . . . . . . . . .Budding Practitioners . . . . . . . . . . . . . . . . . . . . .The Rise of the Fundamentals . . . . . . . . . . . . . .Market Analysis in Today’s Efficient Markets . .Contrasting the Ages . . . . . . . . . . . . . . . . . . . . . .Setting the Record Straight—Dow TheoryStrikes Back . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Chapter 3:121414141515171719222424Price Analysis . . . . . . . . . . . . . . . . . . . . . . . 27The Market’s Price Is Right . . . . . . . . . . . . . . . . 28The Basic Building Block of the Chart. . . . . . . . 28Volume Analysis: Digging Deeper . . . . . . . . . . . 30

viiiChapter 4:INVESTING WITH VOLUME ANALYSISVolume Analysis . . . . . . . . . . . . . . . . . . . . . 32Volume. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Volume Terminology . . . . . . . . . . . . . . . . . . . . . .Volume Data in Market Analysis . . . . . . . . . . . .Volume Validates Price . . . . . . . . . . . . . . . . . . . .Volume Liberates Liquidity . . . . . . . . . . . . . . . .Volume Substantiates Information . . . . . . . . . . .Volume Reveals Convictions. . . . . . . . . . . . . . . .Volume Expresses Interest and Enthusiasm . . .Volume Denotes the Disparity of Opinions . . . .Volume Is the Fuel of the Market . . . . . . . . . . .Volume Exposes the Truth . . . . . . . . . . . . . . . . .Volume Is the Cause . . . . . . . . . . . . . . . . . . . . . .Volume Gives Rise to Velocity . . . . . . . . . . . . . .Chapter 5:Volume: The Force of the Market . . . . . . . 39Volume Is the Force . . . . . . . . . . . . . . . . . . . . . .Volume Leads Price . . . . . . . . . . . . . . . . . . . . . .Volume Interprets Price . . . . . . . . . . . . . . . . . . .B S T.Volume Analysis—Use the Force . . . . . . . . . . . .Support and Resistance. . . . . . . . . . . . . . . . . . . .Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Every Object in a State Motion Stays inMotion Unless Acted Upon . . . . . . . . . . . . . . . .Force Mass Acceleration . . . . . . . . . . . . . . .Every Action Has an Equal and OppositeReaction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Applying the Laws of Motion in VolumeAnalysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Chapter How to Read the Market Like a Book . . . . 53Reading the Tape . . . . . . . . . . . . . . . . . . . . . . . .Understanding the Symbols of the Language . .This Is the Market, Allow Me toIntroduce You . . . . . . . . . . . . . . . . . . . . . . . . . . .Fear and Greed . . . . . . . . . . . . . . . . . . . . . . . . . .54545556

CONTENTSixVolume: The Technician’s DecryptionDevice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Analyzing Price and Volume Bar by Bar . . . . . .The Four Basic Phases of Closing Price BarAnalysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .The Price Bar Is the Market’s DNA . . . . . . . . . .Volume Is the Market’s RNA . . . . . . . . . . . . . . .Volume Price-Spread Analysis . . . . . . . . . . . . . .High Volume Depreciation. . . . . . . . . . . . . . . . .Low Volume Price Movements . . . . . . . . . . . . .Chapter 7:585960616467Volume in Trends . . . . . . . . . . . . . . . . . . . . 73Identifying Trends. . . . . . . . . . . . . . . . . . . . . . . .Trends: The Words of the Market . . . . . . . . . . .Drawing Trend Lines . . . . . . . . . . . . . . . . . . . . .Evaluating the State of the Trend withVolume Analysis. . . . . . . . . . . . . . . . . . . . . . . . . .The Four Phases of Volume Analysis . . . . . . . . .Volume Rules and Laws: Cracking theContradiction Code. . . . . . . . . . . . . . . . . . . . . . .Volume Seasonality Trends . . . . . . . . . . . . . . . . .Chapter 8:575873747477788591Volume in Patterns . . . . . . . . . . . . . . . . . . . 93Patterns: The Market’s Narrative . . . . . . . . . . . . 93Plots: The Interactions of Two Major Trends . . 94Bullish Flags and Pennant Formations . . . . . . 108Chapter 9:Measuring Volume Information . . . . . . . 112The Seven Types of Volume Indicators . . . . . . 114Optimization: A Warning . . . . . . . . . . . . . . . . . 116Chapter 10: Pure Volume Indicators . . . . . . . . . . . . . . 118Volume. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Volume Moving Averages . . . . . . . . . . . . . . . . .Volume Oscillators . . . . . . . . . . . . . . . . . . . . . .Volume Bands . . . . . . . . . . . . . . . . . . . . . . . . . .118119120120

xINVESTING WITH VOLUME ANALYSISVolume Accumulation. . . . . . . . . . . . . . . . . . . . 121Volume at Price . . . . . . . . . . . . . . . . . . . . . . . . . 122Price: Volume/Crocker Charts . . . . . . . . . . . . . 124Chapter 11: Interday Volume AccumulationIndicators . . . . . . . . . . . . . . . . . . . . . . . . . 127On-Balance Volume . . . . . . . . . . . . . . . . . . . . . 128Volume Price Trend . . . . . . . . . . . . . . . . . . . . . 130Intraday Volume Accumulation Oscillators . . . 130Chapter 12: Intraday Volume AccumulationOscillators . . . . . . . . . . . . . . . . . . . . . . . . 132Intraday Intensity Index/AccumulationDistribution . . . . . . . . . . . . . . . . . . . . . . . . . . . .Williams’ Variable AccumulationDistribution . . . . . . . . . . . . . . . . . . . . . . . . . . . .Williams’ Accumulation Distribution . . . . . . . .Intraday Volume Accumulation Oscillators . . .133133134136Chapter 13: Price Range Volume Indicators . . . . . . . . 140Market Facilitation Index . . . . . . . . . . . . . . . . . 140Equivolume Charting . . . . . . . . . . . . . . . . . . . . 142Ease of Movement . . . . . . . . . . . . . . . . . . . . . . 144Chapter 14: Price Accumulation Based on VolumeIndicators . . . . . . . . . . . . . . . . . . . . . . . . . 147Positive and Negative Volume Indexes . . . . . . 147Chapter 15: Tick-Based Volume Indicators . . . . . . . . . 151Volume-Weighted Average Price . . . . . . . . . . . 152Money Flow/Tick Volume. . . . . . . . . . . . . . . . . 152Chapter 16: Volume-Weighted Price Indicators . . . . . 157The Money Flow Index. . . . . . . . . . . . . . . . . . .Volume-Weighted Moving Averages . . . . . . . .VW-MACD . . . . . . . . . . . . . . . . . . . . . . . . . . . .Trend Thrust Indicator . . . . . . . . . . . . . . . . . . .158159168171

CONTENTSxiChapter 17: The Volume Price ConfirmationIndicator . . . . . . . . . . . . . . . . . . . . . . . . . . 182The Calculation . . . . . . . . . . . . . . . . . . . . . . . . .Using VPCI . . . . . . . . . . . . . . . . . . . . . . . . . . . .VPCI in Action . . . . . . . . . . . . . . . . . . . . . . . . .The Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Other Applications: Comparing the VPCIto Other Price-Volume Indicators . . . . . . . . . .Other Applications . . . . . . . . . . . . . . . . . . . . . .183185190194198204Volume Indicators Table . . . . . . . . . . . . . 205Chapter 18: A Compendium of BreadthIndicators . . . . . . . . . . . . . . . . . . . . . . . . . 209Market/Breadth Statistics . . . . . . . . . . . . . . . . .Breadth Statistics: A Source of MarketInformation . . . . . . . . . . . . . . . . . . . . . . . . . . . .Warning Construction Ahead: BreadthData Pit Falls. . . . . . . . . . . . . . . . . . . . . . . . . . .Breadth-Based Indicators . . . . . . . . . . . . . . . . .Positive and Negative Volume Index . . . . . . . .Arms Index/TRIN . . . . . . . . . . . . . . . . . . . . . . .209211214218219220Chapter 19: Buff Up Your Volume: IntroducingCapital Weighted Volume . . . . . . . . . . . . 226It’s Time to Buff Up Your Volume . . . . . . . . . .Traditional Volume: Price VolumeRelationship Disconnect . . . . . . . . . . . . . . . . . .Blue Chips to Cow Chips . . . . . . . . . . . . . . . . .Index Volume Analysis Alternatives . . . . . . . . .Cap-Weighted Volume . . . . . . . . . . . . . . . . . . .Comparing Traditional Volume Talliesto Cap-Weighted Volume . . . . . . . . . . . . . . . . .Flash Crash: Cap-Weighted Volumein Action. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Cap-Weighted Volume: RebuildingBreadth Indicators . . . . . . . . . . . . . . . . . . . . . .226227229231232233235238

xiiINVESTING WITH VOLUME ANALYSISChapter 20: Risky Business . . . . . . . . . . . . . . . . . . . . . 241The Best Offense Is a Good Defense. . . . . . . .The Best and the Worst of It . . . . . . . . . . . . . .The Buy and Hope Strategy . . . . . . . . . . . . . . .Dynamic Asset Allocation . . . . . . . . . . . . . . . . .Risk Management . . . . . . . . . . . . . . . . . . . . . . .The Anti-Volume Stop Loss . . . . . . . . . . . . . . .The Best Mistakes Are the Realized Ones. . . .241243245248251253256Chapter 21: Putting It All Together: Volume-DictatedStrategies . . . . . . . . . . . . . . . . . . . . . . . . . 259Employing Volume-Based Strategies . . . . . . . .Understanding the Market: Supply andDemand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Building an MPS with IndividualStock Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . .The Four Phases of Volume Analysis . . . . . . . .260260269270Chapter 22: Modern Day Volume Issues . . . . . . . . . . . 281How Trading Volume Has Changed. . . . . . . . .Contrasting Market Ages . . . . . . . . . . . . . . . . .The Effect of Changes in Market Structureon Volume Analysis . . . . . . . . . . . . . . . . . . . . . .Volume Data Reliability . . . . . . . . . . . . . . . . . .281293302303Bibliography . . . . . . . . . . . . . . . . . . . . . . . 306

ForewordVolume, price, and time are fundamental concepts in marketanalysis.Volume tracks quantities of things, whether shares of stocks, contracts 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 discovery 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

Praise for Investing with Volume Analysis “Investing with Volume Analysis is a compelling read on the critical role that changing volume patterns play on predicting stock price movement. As buyers and sellers vie for dominance over price, volume analysis is a divining rod of profitable

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