CAP [5229]: A Prediction Using Relative Volume Density (RVD) Analysis

Relative Volume Density (RVD) analysis is a proprietary technical tool that encompass the element of time in price-volume analysis. It can be seen as an extension of Robin Mesch’s market profile analysis as the underlying assumption that market moves from one equilibrium to another or deviate temporary from equilibrium and revert shortly thereafter is similar. By incorporating the most important element in the universe – time – RVD analysis is considered more superior than market profile analysis because of its ability in identifying not just the levels of equilibrium but also the timing of reversal. Such a creation is inspired by the inability of traditional technical tools in identifying pivot points of speculative shares with laser-sharp accuracy. Let’s look at how we can apply RVD analysis in catching the falling knife of CAP, which ran by 20+% in just 2 days.

We start off by adding up the volume traded at each price starting from the day where major shift in sentiment happens. In this case, its 19th of February since it broke RM0.43 with high volume. The RVD bar chart below shows the accumulated traded volume since 19th of February up to the date shown at the horizontal axis of the chart. To ease our analysis and to make the signal more visible, any accumulated transacted volume above 6 million shares are highlighted in yellow while accumulated transacted volume above 10 million shares are highlighted in red. CAP RVD1After breaking the RM0.43 support, CAP’s price moved down and created numerous bases (those highlighted in yellow and red) along the way. This information is useful as the bases will serve as resistance levels when the price reverses. I call these price levels the implicit resistances as they cannot be seen in a day chart. The buy signal came in when the transacted volume at RM0.345 rose from 2 million to 7.5 million and then to around 11 million in just 2 days. The increased in transacted volume in such a short time span provides a clear sign of rising interest as it created a major base, which is essential for huge directional movement. The fact that it was the third base built after breaching the major base of RM0.395 gives CAP’s share price a higher probability of rebounding at this level. True enough, price rose on the 4th of March, and closed at the first resistance level of RM0.36 and continue to rise on the 5th of March. On the 5th of March, whenever price moved up and hit the implicit resistances, it stopped and moved sideway before continue moving upward. This is the greatness of RVD analysis.

Despite working well in identifying pivot points of speculative and non-speculative shares, RVD analysis is not flawless. This method works better in identifying bullish reversal points (buy signal) than bearish reversal points (sell signal) because RVD’s main function is to identify short-term equilibrium and temporary deviation from equilibrium occurs most of the time at the end of the uptrend (due to reflexivity) while solid bases (or equilibrium) are formed most of the time at the end of a downtrend. The best way to complement RVD analysis, thus is by knowing when reflexivity is at work. When price are moving up at great speed with low volume at each price level, we can be sure that the uptrend is about to end soon and it would be wise to start taking profit. Alternatively, we can rely on candlestick reversal patterns to determine its bearish turning point.

Another problem with RVD analysis is that the higher the price rise, the lower its predictive value becomes. This is because the changes in the number of market participants (especially the big players) when the price rises dramatically will blur the analysis since each of them would respect different level of equilibriums (most probably indicated by their average buying price). When this occurs, a new RVD bar starting from a different date has to be created for the analysis to be helpful. In this case, the new RVD bar will start from the 4th of March, the day when the uptrend began.

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