It has been quit a few years since the my explanation on how to use volume distribution (VD) chart, and I think it is time for me to do an update based on my recent observations.
The basic interpretation is still the same, what I want to add is that we now have to interpret the buy/sell pressure with an overall view on the transaction in various categories. The buy up (BU) and sell down (SD) in each categories still represent the interest of the bull and bear respectively in each categories, but we have to be careful to see if the bull or bear is trying to hide its track.
Let me show you a scenario to show you what I meant. Let's say I am a actual big seller (say I want to sell 1000 lots) and I try to not to review my intention too much, what will I do? I will not dump everything (1000 lots) at one go, but slowing feed into the buy queue. By breaking the sell orders into smaller lots size per trade, I am less likely to scare the buyer alway, thus enabling me to get rid of my stock at a better average price. This is especially when the my orders will be amalgamated at the end of the day and I still pay the same brokerage schedule as if I do it in one single order - except that I get a better selling price.
In breaking the order, the statistic picture presented by the VD chart will vary slightly. Instead of 1 big SD seen in higher value category, you see the this SD volume divided and represented in a lower value categories, thus to a certain extend hid my selling pressure. But the SD still captured by VD chart, just that it was push down to a lower value categories. Therefore, when we read VD chart, we have to look at the overall selling pressure presented in various value categories, and not just comparing the BU and SD in the same category.
Now let's look a a real life example: Midas on 2011-12-01.
I captured the VD chart on 2011-12-03 (Sat) morning, therefore the 2011-12-01 VD chart is only represented by the red bars in the 5 day VD chart.
On the first look, there is a bigger BU at >$150k, and big SD at <$15k. If we just look at this two items, we risk to jump into conclusion that big buyer is buying and small seller are selling, giving bullish signal. But if we include our observation with $50-150k & $15-50k categories, we noted that the OVERALL SD is still bigger then BU. Therefore my conclusion is that the bear IS STILL in control.
Therefore it is important to note the overall BU and SD comparing in various categories; if in doubt, dig further (see next posting).
