0, 8.700, 8.850)15.014.5
resistance
14.013.5
support
13.0
resistance
12.512.011.5
support
11.0
resistance
10.510.09.5
support
9.08.58.07.5
10
17
24
1June
7
14
28
6 12July
19
26
29 16August
30 720September
2711October
25 115 22November
613 20December
27
32000
10
18 24
Here is a stock that gave a very easily seen sell signal There was a strong support levelthat was broken with increasing volume and a widening range; a power box to thedownside. After that it had a long decline that consisted of a number of stair-stepsdown. Notice how it would find support at a level, then rally from that level to theprior support level that had become a resistance level. Each drop was on increasing volume, and each rally was on decreasing volume, saying that the decline had further togo. Way to the right of the chart, though, volume became very heavy, and the rangetightened up, thereby producing square Equivolume entries. It was an easily discernable signal that it was time to take profits on the short position.Support and resistance levels should not be used as indications to put on new long orshort positions. They can, though, help to determine when to take profits. The oneexception is that a stock that has a breakout will often move back to the breakout level.If one decides to wait for pullbacks before buying, or light volume rallies before shorting, then a return to the old support or resistance level is to be expected, and is a confirmation that it is time to put on the position. But it is not the primary reason for puttingon the position; the power box out of a consolidation is the primary signal.
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34
TRADING WITH EQUIVOLUME
2.0
Ease of Movement (0.4104), Ease of Movement (0.2549)
1.51.00.50.0-0.5-1.0-1.5GANNETT (63.00, 63.98, 62.60, 63.98)
7069686766
breakout
65646362
resistance
6160595857
pullback
resistance
56555453
support
52
support
5150494847
9
26
310July
17
24
317August
14
21
28
511September
18
25
2October
9
16
23
30
613November
20
27
411December
18
26 22001
Here is one more example, now on the upside. Notice how it came back down after thebreakout, and held right at the old resistance level, before going higher.
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TRADING WITH EQUIVOLUME
35
TRENDLINES AND CHANNELSSo far we have been looking at horizontal lines that define the tops and bottoms of sideways consolidation areas. But as prices move up and down they are also often contained within sloping lines. We tend to draw a pair of parallel lines, enclosing the pricetrend. However, the more important line is the line across tops in a decline and the lineacross bottoms in an advance. They show the levels where we have to become concerned. If we are short, we do not want to stay with the position if it moves out of itsdown channel to the upside. If we are long a stock, we want to cover the position if itbreaks the lower ascending trendline, indicating a loss of momentum. In addition, ofcourse, we will want to look at the type of Equivolume box involved in the reversal.Heavy volume and a big range is a much more bothersome signal than a light volumesmall penetration.Ease of Movement (0.1701), Ease of Movement (0.07269)
0.350.300.250.200.150.100.05-0.00-0.05-0.10-0.15-0.20-0.25-0.30-0.35
GAP (32.00, 32.90, 31.70, 32.64)
403938373635343332313029282726252423222120191817
31
7August
14
21
28
51118 25September
29October
16
23
30
6November
13 20
518 26 2December2001
8
16
22
29
512February
The above chart shows both a down channel and an up channel. In addition, we seehere another example of volume emphasis. All the way down, volume increases ondrops and decreases on rallies. All the way up, volume tends to pick up on rallies anddrop off on pullbacks. Particularly interesting is the Equivolume box at the transitionpoint. It is a typical power box to the upside. It penetrates the descending trendline,making it clear that it is time to cover short positions. But that box is not a signal to golong. It is only saying that the decline seems to have halted; it is not saying the stock isheaded higher.ArmsInsider.com
36
TRADING WITH EQUIVOLUME
The buy signal is seen a couple of weeks later when another power box penetratesresistance after a base building period. In this case it means buying at higher level, butit is buying when there has been a sign of strength.AMER ELEC PWR (43.94, 44.17, 43.45, 43.93)
Nov
Dec
2000
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
50.550.049.549.048.548.047.547.046.546.045.545.044.544.043.543.042.542.041.541.040.540.039.539.038.538.037.537.036.536.035.535.034.534.033.533.032.532.031.531.030.530.029.529.028.528.027.527.026.526.025.525.024.524.0Nov
Dec
2001
Feb
More often, though, there are trends within trends within trends. On the above chartwe are looking at a longer time frame than previous examples, in order to see the various trendlines that can be inserted. The major trend is outlined with the two red lines.Inside that, we have a number of large price swings, each designated with a pair ofgreen lines. Within those trends are a number of minor trends. I have shown a few ofthem with blue lines. For our trading purposes we will be trying to play the moves ofthe intermediate type. The very small moves, you will notice, are usually counter to thetrend we are trading. They are the pullbacks during an advance and the rallies duringa decline. They are very valuable, though, as an indication of the limits of the trend weare trading. Moreover, they tend to confirm that the position we are holding is stillvalid. For example, during an up move, where we are long, we like to see the pullbackmade with lighter volume, and usually getting even smaller as the correction progresses. Those pullbacks are the profit taking that needs to be absorbed on the way up. It ishealthy and expected. If, however, the volume gets heavy on a pullback, it is a warningthat the sellers are getting the upper hand. If the trendline is penetrated it says the sellers are too aggressive. We like light volume pullbacks that stay within the trend.
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TRADING WITH EQUIVOLUME
37
GAPSOften a stock will have a gap in its trading pattern; an area of prices where no tradinghas occurred. It happens when a stock opens sharply higher or lower than the priorday’s trading range, and never moves back into that area. Classic technical analysisclassifies them as one of four types, depending upon where they occur. They can betrading range gaps, breakaway gaps, runaway gaps or exhaustion gaps. UsingEquivolume we find that the volume makes it far easier to see what kind of gap we aredealing with, and therefore, what we are likely to see for price movement after the gap.A trading range gap usually consists of two boxes of about the same size and shape onboth sides of the gap, and usually is not accompanied by the penetration of an important support or resistance level. It is a gap of little meaning.A Breakaway gap is usually quite dramatic. The stock moves up or down out of a sideways area, with so much power that it leaves a gap behind. It is a power box, as wehave seen earlier, but even more so. In a breakaway gap we see both volume and pricerange expand across the gap. That means, a small Equivolume box followed by a largeEquivolume box, and one that is quite tall for its width. A breakaway gap is a strongsignal to buy or sell, depending upon its direction.A Runaway gap is seen when a stock is rising or dropping so fast that it leaves holes inthe trading along the way. It is a sign of a very emotional move, and usually impliesthat the move has further to go. It is identified by two boxes, both large, and both tallfor their width. It is like two power boxes separated by a gap.An exhaustion gap is a sign a move is ending. It is characterized by a tall thin box followed, after the gap, by a short wide box. It shows us that a very powerful move hassuddenly encountered a barricade to further movement. It is like the oversquare boxeswe were looking at earlier, but preceded by a gap. It is usually a strong sign to closeout a position.
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38
TRADING WITH EQUIVOLUME
READ RITE (10.19, 9.688, 10.00)
13.012.512.011.511.0
trading range
10.510.09.5
exhaustion ?
9.08.58.07.57.06.56.0
exhaustion
5.55.0
runaway
4.54.0
breakaway
3.53.0
breakaway31 7Aug
14
21
28
5Sep
11
18
25
2Oct
9
16
23
30
6Nov
13
20
5 11Dec
2682001
16
22
2.529
5Feb
12
On the chart above we see a number of gaps. They have been labeled to show whatkind of gaps the box shapes say they are.Some stocks form many gaps, and others form very few. But whenever a gap isencountered it should be considered and categorized. Gaps are a strong indication ofwhere the price is going to go.
ArmsInsider.com
TRADING WITH EQUIVOLUME
39
CONCLUSIONSAn aggressive trader needs to use every bit of information available, and must makeunemotional decisions based on that information. But the deluge of fundamental information in the marketplace is overwhelming. Moreover, there is no way that a tradercan see every piece of information that may influence the price of the stocks he is trading. And even if he could see all the information, he would still be lacking the mostimportant ingredient, which is the psychological effect of that news. It is useless toknow the news and not know how it is going to influence the thinking of all the millions of people who are reacting to that information. What is needed is a machine thatwill assimilate every known piece of information, ascertain the psychological responseto that information, and apply it to the price of a stock.Luckily that machine exists. It is the market itself. Every tiny bit of information thatcould influence and engender an emotional response does so. People buy and sellstocks in answer to those emotional responses. Those responses are reflected in justtwo final pieces of information, the price and the volume. All a trader needs to do, isobserve the way in which price and volume are exhibiting themselves in the marketplace in order to know exactly how the world is evaluating all of the informationknown, or even suspected, concerning that stock.Equivolume charting does not look at any new information; it just looks at the sameinformation in a more easily interpreted format. It allows us to more easily ascertainhow prices are changing, rather than just seeing that they are changing. It shows theinternal dynamics of a stock. Volume is treated as an equal partner to price, rather thanan afterthought at the bottom of the page.None of the methods we have covered are foolproof. There are always going to be losses as well as gains. The objective is to have more good trades, and larger profits on thegood trades, than losses on the bad ones. To do so calls for discipline and objectivity.That means not only reveling in the successes, but accepting the failures and movingon. It also means having the strength to quickly move out of a position as soon as theevidence says it is time to do so. It means no stock can be your friend or your enemy. Itis just a stranger who can take you where you need to go. When you get there you paythe fare and get off. The stranger who is doing the driving does not care where youwant to go. You have to know where he is headed.
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TRADING WITH EQUIVOLUME
40
Successful trading is not based on luck. It is based on knowledge and ability. I like thewords of a song recorded by Kenny Rogers that say:You’ve got to know when to hold them,Know when to fold them,Know when to walk away,Know when to run.You never count your moneyWhen you’re sitting at the tableThere’ll be time enough for countingWhen the dealing’s done.
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