I recently spent a of long and tense hours at the hospital bedside of a close relative. I noticed that a nurse would appear in the room at regular intervals, chart in hand and instruments at the ready. Her primary duty was to measure and record the patient’s vital signs. She would rapidly check to ascertain whether the patient was still living, and if so, how well. Having noted and recorded pulse, blood pressure, respiration and temperature, she would as quickly move on to see if the patient in the next room’s signs remained vital.
In that I have yet to lose my interest in attractive nurses, and charts have long held a fascination for me, albeit my experience is more with stock charts than medical charts, I reﬂected upon this periodic hospital ritual. The nurse’s job appeared to be primarily one of recording data for the doctors who would, I hoped, turn the information into both a diagnosis and a prognosis. Their ability to look at all of the available data, combined with their skill and experience over many years, were the key to the decisions they would be called upon to make.
The interpretation of Equivolume chart follows closely the methodology used in working with Bar charts, but gains effectiveness, in many cases, because of the inclusion of volume.
It would be absurd, in fact negligent, if a doctor were to entirely ignore a part of the carefully gathered information. Whereas the pulse tells him that the heart is rhythmicly maintaining life at a certain pace, the blood pressure tells him how strongly the blood is being moved through the system, and the resistance it is encountering. Both are equally important measures of the present health and the anticipated future of the patient.
So it is with technical stock analysis. Huge resources of vital data are amassed and made available to the analyst. As with the doctor, the diagnosis of the current condition of the stock, combined with expertise and experience lead to a prognosis. The accuracy of that prognosis, and the proﬁts or losses that inexorably follow, are a function of the skill of the diagnostician. To ignore a part of the data would be as foolish as would be a doctor who did not bother to check the patient’s blood pressure.
There are two vital statistics to stock action: price and volume. One mesmerizes most analysts, while the other often goes unnoticed. This is natural, if not excusable, in that the ﬁrst decides whether one makes or loses money, while the second merely indicates how many shares changed hands. This subordinate role which has been assigned to volume has meant that most charting methods relegate the statistic to an afterthought position along the bottom of a bar chart, and point-and-ﬁgure chartists entirely close their eyes to its existence.
In studying a stock, the price tells us about its movement while volume indicates the quality of that movement. A price move gains or loses importance, depending upon the volume accompanying the move. There is certainly a great difference between a big jump on heavy volume and a similar move. on light volume, yet this difference often goes unnoticed, not because the information is lacking but because it is not easily interpreted.
Equivolume charting, for the ﬁrst time, makes volume an equal partner with price. This is accomplished by moving the volume off the lower margin and into the ﬂow of information. Instead of representing a day’s activity with a line, the posting is expanded laterally to form a rectangle. The top of the rectangle is the high for the day, the bottom line is the low for the day and the width of the rectangle represents the volume for that day. In this way, each day is represented by a box which has a distinctive shape and size, and those two factors, shape and size, give an accurate picture of supply and demand for that stock during that trading day.
The accompanying illustrations show the result of this procedure. The ﬁrst chart, of Prime Computer, is a daily based chart. That is, each box represents one day of trading. The computer which drew the chart had to calculate the average daily volume of the stock, and arrive at a volume increment such that about 100 days of trading would be depicted on the chart, with all boxes in proportion. This number, the unit volume, appears in the legend, and will, of course, be different for every stock.
The other two charts, Freeport McMoran and Intel, are three day charts rather than daily charts. Each box represents three days of trading, thereby compressing the information and allowing a longer time span to be depicted. In addition, the three day charts have a pair of moving average lines overlying the boxes. These are not the usual moving averages, but are a function of volume rather than time. Using a complex computer calculation, the lines are drawn to represent the price over particular volume durations rather than time durations. Note the signals imparted when these two lines cross!
Across the top of each chart is another piece of information; an oscillator which we call Ease of Movement. Its calculation is complex, and 1z descrlbed a mv book Volume Cycles In The Stock Market however, its tendency to reach extremes at turning points in the price of the stock should be apparent. The numerical value of the last day on the chart is given in the legend, allowing comparisons between stocks.
The interpretation of Equivolume chart follows closely the methodology used in working with Bar charts, but gains effectiveness, in many cases, because of the inclusion of volume. Trend lines, channels, gaps, support and resistance levels and consolidation formations all are used in a similar manner. In addition, because of the non-time “X” axis, cyclicality takes on a new signiﬁcance.
Technical analysts who are intent upon making a correct diagnosis of a stock’s action, in order to reach a correct prognosis, might well take a look at Equivolume. Volume is, at last, made a full partner with price. And that partnership could lead to better market decisions!
- Equivolume: A Different Diagnosis By Richard W. Arms, Jr.