When Price and Volume Disagree, Part One

If you’re new to using a cumulative delta study, or you’re wondering how you might use the new indicators in the Acme Volume Balance & Breakdown Pack, have I got a post for you. If you’re not sure what I am talking about, click on the link, have a read-through, then come on back. I’ll be right here.

Back already? Let’s get to it.

So I thought it might be helpful to show you a few of my favorite Acme Volume Breakdown (AVB) “patterns.” But first, a couple pieces of background regarding how I use the AVB:

  1. I use AVB to assess real-time order flow. Sometimes I use it to get a feel for open interest over time frames longer than intraday, but I have yet to seriously study any correlations or non-correlations between cumulative delta-based open interest and future price action.
  2. I really don’t pay much attention to the zero line. On an intraday basis, I am not sure it means much. FACT: buyers or sellers can and do step into the market at any time, completely unannounced.
  3. I mostly pay attention to the AVB at inflection points – my important price levels for the day. If you are familiar with FuturesTrader71‘s vocabulary, he refers to important price levels as “areas to do business.”
  4. AVB confirmation patterns are most useful on rotational or balanced days where there are edges to be played – or days when there is real disagreement over fair price.

Said another way, I use AVB for entry confirmation, not opportunity identification. When I trade the ES, I trade price levels. When the tape approaches areas of interest, and it’s the right kind of day for using the volume breakdown, I look for price action and volume action to disagree. You could fairly call this “divergence.” But often it is more subtle than that word implies. Subtle though they may be, these confirmation patterns present themselves day after day if you know what to look for. Want examples?

The Double Tap Sucker Punch

The ES is famous (infamous?) for twice-testing important intraday levels. It’s basically a subtle kind of head fake, with the aim of drawing in soon to be wrong-footed buyers or sellers. What levels are we talking about here? Well, it can occur at any level, but I see it all the time around the IB high or low, the opening swing high or low, the range midpoint, the ETH low or high, etc. In my view, the Double Tap Sucker Punch (or DTSP™ for short) is one of the most frequent and reliable behaviors of the ES. When I see a double-tap at one of the usual levels, I pay close attention to the conversation that price and volume are having. Is that a note of discord I hear?

In this first example, on 7/21/2011, just before 9am PDT the ES double-tapped what would become the midpoint of the day. As price rotated down from the IB high, it stopped right at a previous swing high, bounced a little then slowly drifted back to the bounce point, looking weak, wounded and about to spring a jugular gusher. But keen observers could see this was most likely an act. The circled and underlined areas revealed a clue as to what was likely to happen next:

Example One - Double Tap Sucker Punch

At the first price tap, aggressive buying volume goosed the tape, then let off for a few minutes to lure in some late shorts and gauge selling interest. After a few feeble candles of selling, still appearing weak and vulnerable, the buyers began twisting the throttle as soon as the mid-price was tagged again. Between the taps, buyers passively soaked up nearly all the selling, wouldn’t allow the delta back down to the previous tap’s level and in the process revealed an imbalance of intent.

Keep in mind that the ES is practiced in the art of deception, and frequently presents variations on the sucker punch: the triple-tap sucker punch; and the occasional quad-tap sucker punch (aka mountain top pattern). Here’s quad-tap example from 7/28/2011:

Example Two - Quad Tap Sucker Punch

Some days you’ll see them all, from 7/26/2011:

Example Three - Technical Knock-Out

Hopefully this was helpful for showing you how you might integrate the Acme Volume Breakdown indicator (or any other cumulative volume study) to into your trading.

Until part two… trade ’em well.

8 replies
  1. will simon
    will simon says:

    thank you for all your posts…i was wondering if the action in globex this morning at 7:00 est onward exhibited the DTSP characteristics and would have been picked up using your indicator? just looking at the raw candlesticks it looks similar…thanks for all your posts on the 71 stream..wrs

    Reply
    • El Duque
      El Duque says:

      Looks “iffy” to me. Looks more like a simple test of the value area low of the session, at least on my 2500 volume chart. Psychology is important in the sucker punch, and that is why it happens around levels like the IB or ETH high/low, etc. so much. My theory is that this behavior is an attempt to fool naive breakout traders… and that’s the wrong way to play the ES intraday IMHO.

      Reply
  2. will simon
    will simon says:

    thank you for the input, i need to ponder this a bit, i have always grappled with when the market is exhibiting non confirmation behavior vs a ‘running correction’ and just recharging it’s batteries for the next push…as i am exclusively a fade trader and have married the volume areas with a plain vanilla indicator to entice me to stand in front of the freight train the second or third final pushes are usually the best of all, and the ones i am usually not on board…i will fire back another question in a bit if you don’t mind, thxs will

    Reply
    • El Duque
      El Duque says:

      Context is everything. As I said in the post, this particular pattern has the highest probability of playing out in your favor on rotational/balance days. Trend days, where the big kids just want to move prices to another level, are a different story.

      Reply
  3. will
    will says:

    i totally agree with that, absolutely, the unrelenting trend days , especially the QE inspired ones, need a better nimble fader than i am…it is the recognition of the day type and the context of the moment that makes it all work…thus the AVB looks to be a strong tool to help define the context of the spot and the moment…is there a way to see it on tradestation?

    Reply
    • El Duque
      El Duque says:

      No idea on Tradestation. I don’t use it. I’d be surprised if someone has not made a cumulative delta study for it though. You’ll have to kick over some rocks and see where it’s hiding.

      Reply
  4. will
    will says:

    thanks, thats what i am doing right now, will have to get those steel toed work boots on as the first couple where not helpful…thank you for all your quick responses, if i find something usable for TS i will post it for any other users who may have a desire for it… will

    Reply

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