Gauging Support and Resistance With Price by Volume

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Gauging Support and Resistance With Price by Volume

Many people believe that charting is just projecting the direction of a price between important support and resistance levels. A support level is defined as a price level that a stock has had trouble dropping below. This is where the majority of buyers join the stock.

Similarly, we understand that resistance is a price level over which a stock finds it difficult to move. This is where many buyers profit and shorts enter. A stock’s price will typically fluctuate between these levels until it breaks out or breaks down. There are hundreds of various strategies for locating these zones of support and resistance, but one of the most underutilized is simply utilizing price by volume, or PBV, charts.

In this post, we will define PBV charts and look at ways for exploiting them to generate profitable trades.

Among the most prominent strategies for identifying regions of support and resistance are trendlines, chart patterns, pivot points, Fibonacci lines, and Gann lines. However, the less widely used PBV charts, which depict volume using a vertical volume histogram, may be very useful in establishing not just the position, but also the strength, of critical support and resistance levels.

What Are PBV Charts?

A PBV chart is essentially a regular volume histogram that has been applied to price rather than time (price is seen on the Y axis and time on the X axis).So, rather than determining whether a stock is in or out of favor (as shown by rising volume levels over time), PBV allows you to assess the degree of purchasing or selling interest at a particular price level. PBV charts may be made using a variety of charting tools as well as free internet charting platforms such as BigCharts.com and StockCharts.com.

Using PBV Charts

PBV charts are extremely simple to use and comprehend. There are three important components to consider:

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  • The quantity of shares traded at a particular price level is indicated by volume strength. The horizontal length of the PBV histogram indicates this.
  • The volume type refers to the number of shares sold in relation to the number of shares purchased. The two contrasting hues observed on each bar show this.
  • The number of times a stock successfully tests and “bounces off” a specific level is referred to as the number of successful responses or tests.

These three variables, when combined, will enable you to assess the strength of a certain price level. Once you’ve determined the price strength, you may combine it with trendlines and other research to define support and resistance levels, discover support bases, and even play gaps.

Finding Support Bases

Support bases are simple situations when a stock ranges before continuing or reversing a trend. Simply use these procedures to establish whether a stock is basing:

  1. After a trending move, draw two parallel, horizontal lines connecting parallel highs and lows in a trading range.
  2. Then, using the PBV histogram, determine if these parallel lines are approaching important price levels.
  3. Finally, take note of the buying or selling pressure (colors) as well as the overall volume to predict the probable direction of a breakout.

The PBV histogram is shown here, along with the now-absorbed Hudson City Bancorp. We can observe from this chart that longer blue bars represent buying pressure or support, while longer red bars suggest selling pressure or resistance. Meanwhile, the higher overall bar shows that traders are interested in that specific price level. In this example, we observe that $12.50 looks to be a level to monitor for an upward breakthrough.

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Image by Sabrina Jiang © Investopedia2020

Locating Support and Resistance Levels

Support and resistance levels are simply places beyond which the price finds it difficult to move owing to strong buying or selling pressure. Simply complete the following to establish regions of support or resistance:

  1. Identify places where the PBV histogram indicates a high level of purchasing or selling interest.
  2. Determine whether these huge interests are purchasing or selling.
  3. Draw horizontal trendlines parallel to these PBV bars, giving priority to those that link the chart’s highs and lows.

Consider this old Google (now Alphabet Inc.) chart as an example:

Image by Sabrina Jiang © Investopedia2020

The trend between these support and resistance levels should be obvious. These are known as “soft zones,” because they consist of just small volume bars between two lengthy bars. Buying and selling based on patterns between these “soft regions” is a typical approach. For example, in the preceding chart of Google, we’d seek to short the stock when it breaches Support 1 and cover when it reaches Support 2.

Playing Gaps

Gaps arise when the price of an asset moves quickly from one point to another, resulting in a conspicuous gap or break between prices in the chart. PBV charts may be used to identify when a gapping stock will find support by just searching for an area where there has been a lot of past interest. Furthermore, gaps might provide regions of future support or resistance, which the PBV histogram can reinforce. Consider the following examples:

Image by Sabrina Jiang © Investopedia2020

A PBV trader would aim to purchase a breakthrough from Resistance 2 and sell when Resistance 1 is achieved in the instance of the now-absorbed DHB Industries (seen above). The gap down produces a region with relatively little resistance to upward movement, indicating that the second objective is likely to be attained.

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Image by Sabrina Jiang © Investopedia2020

In the instance of the now-absorbed Elan Corp. plc (seen above), a trader who purchased on a break above $7.60 (the long PBV bar) would have already generated an almost 100% gain. There was very little resistance to the upward after the major resistance was breached.

Clearly, when paired with gaps, PBV may be incredibly valuable when seeking to purchase recoveries or retracements when gaps develop.

The Bottom Line

PBV charts may be a great asset in your stock research toolbox. When combined with other charting techniques such as trendline analysis and Fibonacci, it is clear to realize how much more information this charting style can provide. Here are some crucial considerations to keep in mind:

  • The first color reflects the volume on days when the price increased.
  • The second color indicates volume on days when the price fell.
  • Strong support or resistance is evident when one color of the bar is much longer than the other.
  • Horizontal trendlines link the top and bottom of the PBV bar for resistance and support, respectively.
  • PBV bars are employed as levels of support and resistance, trading bases, and gap locations.

Note: This post was developed with the assistance of Cal Stanke, co-founder of ChartSetups.com, where he extensively employs PBV analysis in his own study.

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