weekend charting 20th & 21st august 2011, page-35

isplicer,

It would probably be worth your while downloading the PDF in my sig "Master the Markets" written by former syndicate trader Tom Williams. Its a bit of reading but its very easy to read and very much common sense and will go into more detail than I can do justice about the "logic" behind "Volume Spread Analysis."

To save time I've cut and paste and slightly edited one of my other posts from a different forum.

Most of the volume going through the stock market whether it be on or off market is NOT mum and dad investors and individual traders. Most of the volume is what Wyckoff called "The Composite trader" - a term used to describe the consensus of opinion of the professional money in the market - and commonly referred to now days as "Smart Money" or "They" etc - its market makers trading their own accounts, hedge funds, investment banks and trading syndicates, members of the stock exchange etc.
Then on top of that is everyone else commonly referred to as "the herd" which includes Mum and Dad, institutions like Super funds, funds managers like BT (who use other peoples money and can't seem to make any unless theres a raging bull market and always seem to turn a profit even while they lose you money - just had to get that off my chest).
So when we see volume spikes its generally an indication of increased activity of "smart money." And when we see really good news come out we often see an influx of new buyers from "the herd" coming in and often times "smart money" are selling into their buying and this creates your huge volume spikes.
Anyway - when we see huge volume on or off market we are not so concerned about the exact reason - we can't really know whats going on there - and really its irrelevant to us - what we look for is then what the share price does on that volume ie the range of the bar and where it closed and what it does next day/week/hour or whatever timeframe we are trading. The SP will move on supply and demand and the lack of supply or the lack of demand. If smart money are buying up the floating supply then there is no resistance to higher prices and it has to rise. If smart money are distributing to the herd, then price must collapse. Doesn't matter how good a stock is, unless it is supported by "smart money" it can't maintain an upmove.
So if you are "smart money" and have huge holdings to distribute or you want to accumulate huge holdings, you have certain logistical obstacles you have to overcome - how do you buy large amounts of stock without putting up the price against your own buying? And how do you sell large amounts of stock without putting the price down against your own selling? So Typically smart money BUY on down bars and SELL on up bars (against the herd-ie they need to be fed losers)- and when we see price collapse (Like NEN at the tops in May and then again in July) its not because smart money are selling - its because they already sold at the top and the thing subsequently implodes on itself.
So with NEN at the Top in July with that huge upbar on ultrahigh volume, the huge volume is either SM absorbing supply from the herd at resistance - or they are distributing to the herd's buying. We don't really know on the day until we see what happens next - But he with the deepest pockets (ie Smart money) wins in the finish. If it breaks higher then often they will bring the price back to the high volume area to mop up any leftovers -and any light volume coming back into that bar will tell them they have absorbed it all and are safe to take it higher - but as we know it broke down from there. If it was all buying then it would not have been able to close on the low or off the high and surely it must go higher. But the fact that it subsequently closed lower tells us there must have been more SELLING and a lot of it.
So to make a long story longer, At our most recent low you will see high volume kick in and the price subsequently rises, so SM must have been absorbing the panic from the herd at that level - but on Thursday we see an equally high volume UP BAR that closes off its high - so there must have been selling coming in to close off its high and then price has broken down after that to confirm. The weakness I refer to is the selling at the top in May and July. In a down trend we tend to pay more attention to weak bars until we see a change in trend. So now what we are looking at is that buying on Black Tuesday where the price was held up. If its genuine SM buying then they will bring it back into there to test for further supply and whipsaw the price to try and shakeout anyone who bought on Thursday or at a higher price. If it was not genuine buying - or if it was the herd buying the support level there -then the price will collapse through that area. So this is what we are watching now. Any really light volume coming back into that high volume(supply) area that then results in a higher low will tell us the selling has been absorbed. and we can start to anticipate higher prices again.
Hope I haven't confused the crap out of you - but if you read 'master the Markets" then that will probably explain things a bit better than I have.