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 Stocks & Commodities V. 33:06 (3233, 35): Volume Analysis With The SPY by Domenico DErrico

by Domenico DErrico

V olume analysis is a form of techni-

cal analysis that attempts to look
at price action and how it relates
to volume. It is similar to Market Profile in
that it identifies the price level at which sup-
ply & demand are in equilibrium and where
it is in imbalance. In this article, I will use
the concept of volume analysis to identify
relevant supply & demand areas on a chart
and use them as my entry or exit points.
As you can see in Figure 1, there are three
different types of volume area. These are
based on volume traded. In addition, the
shape of the point of control (POC) can
provide traders with additional information
(Figure 2). You can have a narrow POC,
which suggests that a lot of traders are us-
ing this level as a reference point. You can
think of it as a support or resistance level. A
wide POC isnt as concentrated as a narrow
one, so your support & resistance level is a
much wider price range. Sometimes theres
no clear POC, which means its best to not
trade when you see that happen.

SPY volume analysis

Using Trend Profile Pro, a TradeStation
I Spy With My Little Charts add-on, Ill focus on the SPDR S&P 500

Volume Analysis
ETF (SPY) swing price movement that
started on February 5, 2014 and ended on

With The SPY

December 5, 2014 (price range $175208).
On December 5, 2014, the volume profile
looked similar to what you see in Figure
3. Youll notice that volume is displayed as
When something is trading at or close to its all-time highs, you need to know horizontal histograms at various price levels
whether to sell it or continue holding it. Viewing the markets in terms of supply and are colored according to the criteria in
& demand areas is one way to do it. the table in Figure 1.
Lets see this in terms of relevant supply Currency: Lisa S./ Caliper and hands: Alexandru Nika/Shutterstock/ Collage: Nikki Morr

Volume areas by trading volume & demand areas:

Trading volume Expected price behavior Notes n A narrow POC detected at 207.4
Prices tend to slow down n A no supply/demand area at
High volume = Strong Blue/red
1
supply/demand areas
through such areas due to
histograms 204207
heavy prior supply/demand
n A narrow POC at 204
Prices tend to slow down
Medium volume = Normal through such areas due Red/green n A no supply/demand area at
2 202204
supply/demand area to normal prior supply/ histograms
demand n A heavy supply/demand area detected
Prices tend to move quickly at 192198
Low volume = No supply/
3 through such areas due to Yellow histograms
demand areas
lack of prior supply/demand What happened since then?
FIGURE 1: VOLUME AREA. Here you see three different types of volume area, which are based on On the hourly chart of the SPY in Figure
volume traded. 4 you can see price action following the

Copyright Technical Analysis Inc. www.Traders.com

 Stocks & Commodities V. 33:06 (3233, 35): Volume Analysis With The SPY by Domenico DErrico
Volume areas by point of control shape
Point of control shape Expected price behavior Notes
POC is very clear. A lot of traders
FIGURE 2: POINT OF CONTROL. There are three
types of points of control. Theres the narrow, are probably using this level as
wide, or blurred. Each gives an indication of how Narrow point of control a reference point; it could be
1
you should trade. (POC) considered a single support/
resistance level. Price can ac-
December 5, 2014 analysis. celerate after a breakout.

n December 8, 2014: A first down POC is still clear, but the entire
movement broke level 207.4 and 2 Wide point of control area should be considered a
quickly went down through the support/resistance level.
yellow area (204207); it was
rejected at the 204 level. There is no clear POC. Price
n December 10, 2014: A new is expected to start chopping
3 Blurred point of control
down move temporarily broke inside such an area. No trading
the 204 level. action is recommended.
n December 11, 2014: A strong
down leg broke below the 204
support level, sharply went down
through the yellow area from
202204, and was rejected by
the top of the 192198 area. 208.01
Narrow POC
No supply/demand zone
205.00
FIGURE 3: THE VOLUME PROFILE. Volume
is displayed as horizontal histograms at various
Narrow POC
price levels and are colored according to the
criteria in the table in Figure 1. Theres a narrow No supply/
POC detected at 207.4, a no supply/demand area demand zone
200.00
at 204207, a narrow POC at 204, a no supply/
demand area at 202204, and a heavy supply/
demand area detected at 192198.

Heavy supply/ 195.00

n December 18, 2014: There was
demand zone
a gap open above 204, which
was followed by a quick test,
190.00
and then prices rallied to 207.4,
7/16 Aug 8/19 Sep 9/18 Oct 10/17 Nov 11/19 Dec 12/17
where the rally stopped.

Whats next?
At this point the SPY is attempting
another rally, but any long-term view
needs to be confirmed by price break- 208.00
ing out and holding at the 207.4 level.
207.00
On December 23, 2014, price was in 206.69
the middle of a no supply/demand 206.00
area, meaning that volatility would be 205.00
4
expected to remain high for the next 204.00
trading sessions. The 204 level could 1
203.00
still be considered a good stop-loss 2
for existing long positions or a stop 202.00
3
201.00
200.00
FIGURE 4: SEEING PRICE UNFOLD. On this
hourly chart of the SPDR S&P 500 ETF (SPY) 199.00
you see how price moved in relation to the
various support & resistance levels. 11/24 11/26 Dec 12/3 12/5 12/9 12/11 12/15 12/17 12/19 12/23 12/25

Copyright Technical Analysis Inc. www.Traders.com

 Stocks & Commodities V. 33:06 (3233, 35): Volume Analysis With The SPY by Domenico DErrico
Volume analysis identifies
relevant supply & demand areas
on a chart that you can use for
entry or exit points.
& reverse for aggressive traders keen to open short posi-
tions. Should the price come down into the heavy demand
area at 192198, it is likely that the downward price move-
ment could slow down due to heavy prior volume activity.
Keeping an eye on price action in relation to its volume
activity can give you an indication of the strength of a trend. It
will also help you identify support & resistance levels. These
will help you in making better entry and exit decisions.
Domenico DErrico is a TradeStation platform developer and
a two-time winner of the TradeStation developer challenge.
He works as an advisor for asset managers and professional
Copyright Technical Analysis Inc. www.Traders.com
traders from different countries. He has a background in sta-
tistics. He may be reached at dderrico@Trading-Algo.com.
Further reading
Chicago Board Of Trade [1994]. Market Profile Study
Guide.
Dalton, James F., Robert Bevan Dalton, and Eric T. Jones
[2007]. Markets In Profile: Profiting From The Auction
Process, Wiley Trading.
Steidlmayer, J. Peter, and Steven B. Hawkins [2002]. Steidl-
mayer On Markets: Trading With Market Profile, 2d ed.,
Wiley Trading.
Weis, David H. [2013]. Trades About To Happen: A Modern
Adaptation Of The Wyckoff Method, Wiley Trading.
TradeStation; Trend Profile Pro (Trading-Algo.com)
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