I am writing something about VSA after a long time. The last time I posted the buying and selling pressure indicator which is a good add on indicator for VSA. Now I am going to talk about indentifying hidden weakness in the bars. Many times we see up bars closing near the top with good volumes. Most would naturally assume there is strength in those bars as it is an up bar, closing in the top and has good volume, all traits of strength. However there could be hidden weakness in these bars. Obviously the question is why and how we identify these.
Let us take the nifty chart as example. In the chart I have plotted the chart in one pane, the volume in another. The third pane consists of a new indicator which I call as the Effort index. This chart plots the effort (in effect volume) as bars below the middle line. The result is plotted above the middle line as bars. Now let is look at the charts and focus on the three bars marked 1, 2 and 3. In the Bar marked 1 we can see a wide spread “Effort to Move up Bar” with good volume. In the pane three we can see that the effort was high and the result was also equally high. In other words the effort produced the required result. Now look at the bars marked 2 and 3. These are up bars closing near the top and volume was high almost equal to the previous day’s volume. So it is natural to consider that there is strength in these bars as well. But when we look at the pane 3 we see that the effort was high but the result was poor. So there is a mismatch between the effort and the corresponding result which indicates weakness. The reason could be that the smart money has been distributing without bothering for higher prices. So these two bars (marked 2 and 3) really indicates weakness rather than strength. As you can see the weakness manifested from the very next bar the market came down. So looking at the effort and the results can tell us more about the bars. This is helpful in bar to bar analysis.
I am planning to release the new indicator “Effort Index” soon. More about is soon.