Volume by Price (VP) is a volume technical indicator that shows the amount of volume for a specified price range within a defined period. It uses the closing price and displays horizontal volume bars to display the price ranges. These bars are often separated with two colors to differentiate up the volume (green/grey) from down volume (red). By combining volume and closing prices, this indicator helps to isolate high-volume price ranges to help identify key support and resistance levels.
The formula for Volume by Price is simple. It is based on the entire period displayed on the chart (i.e., 1-year, 2-year, etc.). For instance, in a 1-year chart, the VP would be based on all the daily closing prices for this 1-year window. This indicator is not designed to calculate the Volume by Price range beyond the historical data defined on the chart.
The objective of the Volume by Price is dual purpose - to identify the current support and resistance levels as well as to project future support and resistance levels. Typically, price zones with heavy volume represent active trading/investment interests which tend to translate to future supply (selling) or demand (buying). Potential buyers need to monitor the Volume by Price bars underneath prices as potential support during a pullback. Similarly, Volume-by-Price bars above prices ca be potential resistance on a rally.
Price breaks above or below long Volume by Price bars tend to represent technical signals. A breakout above the long bar (high volume) can show technical strength because the demand was strong enough to overcome overhead resistance (supply). On the other hand, a violation below a long bar (high volume) shows technical weakness because supply overwhelms demand.
Although the Volume by Price indicator can help to identify present or future support and resistance the indicator can also be useful to gain greater insights into the supply and demand equilibrium at specific price points. By analyzing the positive volume (green) to the negative volume (red) volume within the Volume by Price bars it will identify the area that provides more demand to further validate strong support. Similarly, a long red bar depicts more supply that can also further validate stronger resistance. Remember, as with all technical indicators the Volume by Price indicators works best in combination with other technical indicators and analysis techniques such as trend indicators (moving averages), price oscillators (overbought/oversold), and chart patterns (gap ups, gap downs, necklines, etc.).
Attached below are the Volume by Price bars for the S&P 500 Index (SPX), Dow Jones Industrial Average (INDU), and the Nasdaq Composite Index (COMPQ). Note the parameters are 1-year daily data of last sale historical data. This would then imply the high-volume resistance and support zones represent short-term supply and demand levels. By expanding the analysis to weekly data with longer duration or even to monthly data the intermediate-to-longer-term resistance and support levels can be identified.
A summary of the high-volume support and resistance zones are provided for each of the major stock market indexes:
S&P 500 Index (SPX – 3,335.47)
High-volume support = 3,150 and High-volume resistance = 3,350
Dow Jones Industrial Average (INDU – 27,452.66)
High-volume support = 26,800 and High-volume resistance = 27,750
Nasdaq Composite Index (COMPQ – 11,089.25)
High-volume support = 10,325 and High-volume resistance = 11,175