When you distill the volume price analysis methodology to its core principles, it is simply a question of interpreting whether volume and price are in agreement or disagreement and codified in Wyckoff’s three laws of which refer to effort and result. If effort and result are in agreement, then all is well and we continue to consider the next candle or groups of candles and associated volume.
If effort and result are not in agreement, in other words anomalous, then we consider this in the context of where we are in the price chart and where the price is likely to be heading next. And this leads to the principles of benchmarking which I have covered in previous posts, and it is in this context I want to highlight the daily chart for Ansys (NASDAQ:ANSS) to help you avoid falling into this trap.
Let’s begin by considering the price action for last week which was interesting as the price was once again testing the well-developed resistance at $376 per share and denoted with the red dashed line of the accumulation and distribution indicator. And perhaps if we start with Tuesday’s price action which closed as a solid wide spread up candle on good volume so price and volume are in agreement here.
Wednesday followed with a move lower, but the buyers stepped so the candle closed with the deep wick to the lower body confirming bullish sentiment. Volume is a little higher than the previous day so we are expecting some further positive price action to follow. Then comes Thursday’s move, both volatile and extreme in terms of price, but look at the volume. It is only marginally higher than the previous two days, yet the price has moved a very long way.
Judged against the context of volume earlier in the week, this is clearly anomalous. Effort and result are in disagreement. The effort (volume) required to drive the price this far should be substantially higher, perhaps two or even three times what we see here. So the conclusion for this candle is simple. The price is being marked up by the market makers without their participation. In other words, it is a trap move and we can expect to see congestion or a reversal to follow. Friday’s price action, therefore, came as no surprise with the stock selling off under very high volume and price action. Moving forward it is the volatility candle that will dictate the coming price action.