Stocks & Commodities V.

29:5 (16-23, 28): In The Volume Zone by Walid Khalil and David Steckler
INDICATORS

Trending Or Nontrending?

In The Volume Zone

Here’s a look at the volume zone oscillator, which
can be applied to trending and nontrending
markets. Find out how it can be used to trade the
Djia, Spy, and gold.
axiom of technical analysis states that
The volume zone oscillator
Volume is simply the number of shares or contracts
that have been traded throughout the day, so the higher
the volume, the more active the security. Volume is
always treated as a secondary indicator, despite its
importance in confirming trends and chart patterns.
Volume analysis is a key component of analyzing

An with few exceptions, all technical indi-

cators can be classified as either trend-
and predicting the future direction of an asset. Joe
Granville introduced the on-balance volume (Obv)
ing or oscillating (nontrending) in their indicator in his Granville’s New Key To Stock Market
design. This new indicator, the volume Profits. This was one of the first and most popular
zone oscillator (Vzo), addresses both. indicators to measure positive and negative volume
In his book Technical Analysis Of The Financial flow. The concept behind Obv is that volume precedes
Markets, John J. Murphy explains that using oscil- price. Obv adds a period’s volume when the close is
lators provides three benefits: up and subtracts the period’s volume when the close
n Overbought and oversold conditions warn that
is down.
price trend is overextended and vulnerable. Unlike the Obv, which discards such criteria, Vzo
takes into account both time and volume fluctua-
n Divergence between oscillator and price action tions from bearish to bullish and vice versa. Vzo
shows hidden strength or weakness in the market, takes volume actions one step forward by smoothing
which is not apparent in the price action.
the volume and plotting such actions in the form
n The crossing of the zero line can give an impor- of an oscillator, not as a trend-following indicator
tant trading signal. like the Obv. These modifications take the form
of a leading indicator that provides buy/sell signals
The formula depends on only one condition: If based on oversold/overbought behavior.
today’s closing price is higher than yesterday’s,
then the volume will have a positive value VOLUME ZONE OSCILLATOR CODE
(bullish). Otherwise, it will have a negative With appreciation to Aapta member Bob Plot1(VZO, “VZO”);
value (bearish). So: Fulks for assistance with the TradeSta- Plot2(+60, “+60”);
tion coding. Plot3(+40, “+40”);
Volume zone oscillator = 100 x (VP/TV) TradeStation
Plot4(+15, “+15”);
Plot5(-5, “-5”);
Volume zone oscillator: Plot6(-40, “-40”);
where: Plot7(-60, “-60”);
VP (Volume position) = X-days Ema (± volume) Input: Period(14); Plot99(0, “zero”);
Vars: MV(0), R(0), VP(0), TV(0), VZO(0);
MetaStock
and MV = iff(DataCompression >= 2, Volume zone oscillator:
AbsValue(Volume),Ticks);
TV (Total volume) = X-days Ema (volume) R = Sign(Close - Close[1]) * MV; Period := Input(“Y” ,2 ,200 ,14 );
VP = XAverage(R, Period); R :=If(C>Ref(C,-1),V,-V);
TV = Xaverage(MV, Period); VP :=Mov(R,Period ,E);
TV :=Mov(V,Period ,E);
if TV <> 0 then VZO = 100 * VP / TV; VZO :=100*(VP/TV);
by Walid Khalil and David Steckler VZO

Copyright © Technical Analysis Inc.

 Stocks & Commodities V. 29:5 (16-23, 28): In The Volume Zone by Walid Khalil and David Steckler
^DJI Weekly INDICATORS
9/11/2009 Open 9440.13 Hi 9698.67 15,000
Lo 9402.8 Close 9605.41 (1.7%) 4 14,000
13,000
2
12,000
3 11,000 and its money flow analysis
1 10,000 also explain Dow theory’s
trend phases of accumula-
6 9,605.41
9,000
tion, public participation, and
8,000
7 distribution.
Uptrend Turning point Downtrend Uptrend
5
7,000 Figure 1 displays more than
three years of Dow Jones
6
Industrial Average (D jia )
^DJI - Volume Zone OSC (14) = 31.05
4
31.0627
weekly data, numbered at
1 2
3
7 points discussed in detail, and
^DJI - Volume()
5 the zones are colored, accord-
ing to their trend. The chart
AMIBROKER

shows only the four major

zones (+60, +40, ‑40, ‑60) plus
Figure 1: the volume zone oscillator (vzo). On this weekly chart of the DJIA you see all the components of the VZO: the zero (horizontal black line):
60-period EMA, 14-period ADX, and the seven oscillator zones.
 

The Vzo discerns bullish volume from bearish volume and
is useful for identifying at which zone (bullish or bearish)
volume is positioned. The oscillator is plotted on a vertical
scale of&
sis of STOCKS ‑100 to +100. Movements
COMMODITIES above +40 are considered
magazine
overbought, while an oversold condition would be a move
under ‑40. Movements above +60 mark extreme overbought
roval or changes:
levels, while an extreme oversold condition is a move under
‑60. The zero line demonstrates equilibrium between buyers
-1307 • email: KMoore@Traders.com
and sellers. The components of the Vzo system are:
n 60-period exponential moving average (Ema)
n 14-period average directional movement index (Adx)
ROOF #1
n Seven oscillator zones: +60, +40, +15, zero, ‑5, ‑40,
and ‑60.
VZO clarifies money flow
Volume figures alone do not provide a clear money flow analysis
or even explain changes in volume attitude during different
trends; Vzo analysis can add important information about the
trend as well as a clear money flow analysis. Vzo movements
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1 During the uptrend period starting from October 2005
until October 2007 (area 1), Vzo was moving with
the trend, fluctuating between the zero line and the
upper zone (public participation phase).
2 At area 2, price was rising normally while the Vzo was
declining, forming a negative divergence (distribution
phase).
3 At turning point zone 3, Vzo has made a new two-year
low, giving a warning that more shares than usual have
been distributed (distribution phase).
4 At point 4, for the first time in more than two years,
Vzo has failed to reach the upper boundary, giving
another warning that bears are taking control (distribu-
tion phase).
5 At zone 5, Vzo clearly shows the heavy selling pressure
confirming the downtrend (panic & public participation
phase).
6 At point 6, and for the first time since April 2007,
Vzo has reached +40, indicating new money flows
(accumulation phase).
7 Finally, at point 7, Vzo has rebounded from the zero
line without reaching ‑40, indicating an uptrend attitude
(accumulation phase).

The volume zone oscillator is useful in uptrending, down-

trending, or sideways market conditions. The following ex-
amples of the Vzo include the seven oscillator zones: +60 is
marked with green crosses, the +40 with a green line, the +15

All technical analysis

indicators can be
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Blue Wave Trading: Often Imitated...Never Duplicated
classified as trending
www.bluewavetrading.com • 808-281-8391 or nontrending.
Copyright © Technical Analysis Inc.
 Stocks & Commodities V. 29:5 (16-23, 28): In The Volume Zone by Walid Khalil and David Steckler
SPY
L=112.81 0.16 0.14% B=112.81 A=112.82 O=112.32 Hi=112.92 Lo=111.98 V=87,961,317 Mov Avg Exponential (Close,60,0) 109.72 124.00 INDICATORS
122.00
120.00
118.00
116.00
and +40, indicating more buying
pressure than selling pressure.
114.00
112.81
Uptrend system
112.00
60-Day EMA 109.72
rules 108.00
106.00 When the Adx is above 18,
Volume Zone Oscillator (14) 25.01 60.00 40.00 15.00 -5.00 -40.00 -60.00 0.00 the action is considered to be
80.00
60.00 trending. The price crossing the
40.00
25.01 60-day Ema determines whether
the trend is bullish (above the
15.00
-5.00
Ema) or bearish (below the
-20.00
-40.00
ADX w/Level (14, 18, Black) 18.63 18.00 18.00
-60.00
45.00
E ma). When the Adx is below
40.00 18, the action is considered
35.00
30.00
to be sideways, regardless of
25.00 whether price is above or below
the Ema.
TRADESTATION

18.63
15.00

echnical Analysis of STOCKS & COMMODITIES magazine When price is above the 60-
Figure 2: the seven oscillator zones. On the daily chart of the SPY, these zones are marked on the VZO subchart, with day Ema and Adx is greater than
each horizontal line representing one zone. 18, buying signals are issued
ren Moore with approval or changes: when:
with a gray line, zero with a black line, ‑5 with a light blue n The Vzo crosses from below ‑40 to above ‑40 (over-
-0570 • fax: 206-938-1307
line, • email:
‑40 with a red line, KMoore@Traders.com
and ‑60 with red crosses. The zones sold reversal)
are marked on the daily Spy with Vzo in Figure 2.
n A retracement down from +40 that fails to reach ‑40
is common during an uptrend. Vzo will not reach the
Uptrend psychology
PROOF #1 lower boundary and will rebound from a low above
During uptrends, volume rises with rising prices
‑40. Thus, crossing from below zero to above gener-
and falls during corrections. This is one of Dow
ates a buy signal. To reduce whipsaws, you can wait
theory’s basic tenets, as expressed by Robert
for a crossing from below zero to above +15.
Edwards and John Magee: “Volume goes with the
trend.” Long-term investors tend to accumulate Three selling conditions occur during a long position
shares gradually, leading to a major shift in the demand/supply when:
outcome toward the demand, which in turn leads to waves of
n The Vzo rises above +60 and starts to go down
higher lows followed by higher highs.
Volume tends to increase upon reaching new price territo- n A negative divergence appears at an extreme level
ries and decrease during downward corrections. The Vzo will and Vzo breaks below +40
react to that behavior by staying in the upper zone between zero
n Price goes below the 60-day Ema and Vzo falls
below zero.

Downtrend psychology
During downtrends, volume rises with falling prices and falls
Advanced algorithms deliver during upward corrections. Long-term investors tend to lay off
low lag, low noise analysis. their shares gradually, leading to a major shift in the demand/
supply outcome toward the supply, which in turn leads to
waves of lower highs followed by lower lows. The Vzo will
react to that volume behavior by staying in the lower zone
Now featuring between ‑40 and zero, indicating more selling pressure than
Tools for... buying pressure.

Downtrend system rules

Also for: AmiBroker, Wealth-Lab, MetaTrader, Wavewi$e, Excel, Investor/RT, BioComp Profit, NeoTicker, When price is below the 60-day Ema and Adx is greater than
Tradecision, TradingSolutions, MATLAB, TradeStation, Ninja Trader, eSignal, NeuroShell Trader, Financial
Data Calculator, Genesis TradeNavigator and TradersStudio. 18, sell short signals are issued when:

www.jurikres.com • 800-810-3646 • 719-686-0074 n The Vzo crosses from above +40 to below +40 (over-
bought reversal)
For more information circle No. 10

Copyright © Technical Analysis Inc.

 Stocks & Commodities V. 29:5 (16-23, 28): In The Volume Zone by Walid Khalil and David Steckler
SPY
L=112.73 0.08 0.07% B=112.73 A=112.74 O=112.32 Hi=112.92 Lo=111.98 C=112.73 V=88,987,876 Mov Avg Exponential (Close,60,0) 109.72 124.00
INDICATORS
122.00
120.00
118.00 n The Vzo falls below ‑60
116.00 and starts to go up
114.00
112.73
112.00 n A positive divergence
60-Day EMA appears at extreme lev-
els and V zo breaks
109.72

above ‑40
108.00
106.00
Volume Zone Oscillator (14) 25.07 60.00 40.00 15.00 -5.00 -40.00 -60.00 0.00 Bearish divergence
80.00
n Price goes above the
60.00 60-day Ema and Vzo
Sell
Buy S Sell short
40.00
25.07
rises above zero.
15.00
-5.00
B -20.00 With this information, now
review the Spy with Vzo in
-40.00
-60.00
Figure 3, but annotated with
ADX w/Level (14, 18, Black) 18.63 18.00 18.00 45.00

buy and sell information.

35.00

Back in mid-February 2010,

25.00
18.63
15.00
when the Adx was greater
FIGURE 3: TRENDING CONDITIONS. All conditions for the buy and sell signals are met in the areas marked buy and sell on the VZO. than 18, Spy rose back above
18.63

Also note the sell short signal on June 11, 2010. Price was below its 60-day EMA and the VZO crossed up and down through zero. its 60-day Ema while the Vzo
crossed up and down through
the zero line. The price closing
GLD above the Ema on February
17 (far left, blue ellipse) was
L=123.80 0.22 0.18% B=123.79 A=123.80 O=123.97 Hi=124.29 Lo=123.43 C=123.80 V=8,061,633 Mov Avg Exponential (Close,60,0) 119.45
122.00
120.00 accompanied by the Vzo clos-
119.45
118.00 ing at 7.80 (blue rectangle,
116.00 labeled buy), its highest close
114.00
since January 19. This posi-
112.00
tion would have remained
112.73 long until March 18 when the
110.00
110 Vzo closed well above +60
and then fell lower (second
60-Day EMA 108.00
106.00
blue ellipse and second blue
104.00
rectangle, labeled sell).
Volume Zone Oscillator (14) 25.07 60.00 40.00 15.00 -5.00 -40.00 -60.00 0.00
80.00
The next buying opportu-
60.00 nity came on March 29. Spy
40.00
22.16
15.00
was trading above its 60-day
-5.00 Ema (third blue ellipse) and
--20.00
-40.00
the Vzo fell below and then
ADX w/Level (14, 18, Black) 18.56 18.00 18.00
-60.00 rose back above zero (third
26.00
blue rectangle, labeled B).
18.56
This trade was also profitable,
14.00 exiting on April 16 when the
Vzo clearly made a bearish
FIGURE 4: NONTRENDING CONDITIONS. In such situations, the VZO fluctuates between ‑40 and +40, indicating a balance between divergence with price (note
buyers and sellers. the rising price trendline and
the falling Vzo trendline) and
n A retracement up from ‑40 that fails to reach +40 is com- after rising above +40, closed below +40 (fourth blue ellipse
mon during a downtrend. Vzo will not reach the upper and fourth blue rectangle, labeled S).
boundary and will fall lower from a high below +40.
Thus, crossing from above zero to below zero generates
a sell short signal. To reduce whipsaws, you can wait In nontrending
for a crossing from above zero to below ‑5 periods, the demand/
There are three covering/closing conditions during a short
supply outcome is
position when: neutral.
Copyright © Technical Analysis Inc.
 Stocks & Commodities V. 29:5 (16-23, 28): In The Volume Zone by Walid Khalil and David Steckler
GLD
L=123.80 -0.22 -0.18% B=123.79 A=123.80 O=123.97 Hi=124.29 Lo=123.43 C=123.80 V=8,061,633 Mov Avg Exponential (Close,60,0) 119.45
122.00
120.00
119.45
118.00
n The Vzo crosses from
116.00
below +15 to above
+15.
114.00
112.00
112.73
60-Day EMA
110.00
Two selling conditions occur
108.00 during a long position if:
106.00
104.00 n The Vzo rises above
Volume Zone Oscillator (14) 25.07 tt 15.00 -5.00 -40.00 -60.00 0.00
+40, use the sell rules
Sell 80.00 from when Adx is great-
er than 18
60.00
Buy 40.00
Buy
22.16
15.00
-5.00 n The Vzo never rises to
+40, sell when it closes
Sell Multiple buy signals --20.00
-40.00

ADX w/Level (14, 18, Black) 18.56 18.00 18.00

-60.00 below ‑5.
26.00
18.56 If the Adx is less than 18,
14.00 sell short signals are issued
when:
FIGURE 5: BUY AND SELL SIGNALS IN NONTRENDING CONDITIONS. Two buy and two sell signals were indicated by the VZO. There
were also numerous buy signals on GLD after June 7, 2010, when the ADX fell below 18 and the VZO rose above 15. n The Vzo crosses up from
above +40 to below +40
A few days later came the flash crash on May 6 that sent n The Vzo crosses from above ‑5 to below ‑5.
Spy below its 60-day Ema. Time to watch the short side! The
Vzo rose above ‑40 and chopped around for a week in late Two covering/close conditions can be found during a short
May to early June. The sell short signal came on June 11 and position if:
the following few days (yellow rectangle, labeled sell short), n The Vzo falls below ‑40, use the close/cover rules
when with price still below its 60-day Ema (yellow ellipse), from when Adx is greater than 18
the Vzo start crossing up and down through zero.
Figures 2 and 3 explained how Vzo is used in trending n The Vzo never falls to ‑40, cover/close when it closes
conditions, when the Adx is greater than 18. Figures 4 and 5 from below +15 to above +15.
display the Vzo action in nontrending conditions when the
Adx is less than 18. Take a look at Figure 4. Now look at the Gld chart with annotations in Figure 5.
On March 3, 2010, the Vzo rose above +15 when the Adx
Nontrending (oscillating) psychology was well below 18. That was the first buy signal (first yellow
In nontrending periods, the demand/supply outcome is neutral, rectangle, labeled buy). The Vzo fell below ‑5 on March 8
with periods of buying followed by periods of selling. The Vzo (blue rectangle) so the trade would have been sold for a loss
usually reacts to this volume behavior by fluctuating between of 1.56% before transaction costs.
‑40 and +40, indicating a balance between buyers and sellers. The Vzo issued another buy signal on March 29, 2010
If Vzo reaches the zone between ‑40 and ‑60, it means that (second yellow rectangle, labeled buy); ignore the relationship
sellers are finishing offloading their shares, which increases between price and the Ema when Adx is less than 18. Gld
the likelihood of buyers stepping in. If Vzo reaches the zone rallied, and by April 9, the Vzo was above +60. On April 12,
between +40 and +60, it means that buyers are finishing up the Vzo fell below +60 (green ellipse), so even though the
accumulating their shares, which increases the likelihood of Adx is below 18 (it was 17.46), follow the sell rules for when
sellers stepping in. Adx is greater than 18 and sell on the close.
This second trade would have been sold for a 3.9% gain
Nontrending (oscillating) system rules before transaction costs. These trades assume entries and
Nontrending conditions exist when the Adx is less than 18. exits at the closing price and are hypothetical, so there’s no
When the Adx is below 18, it appears as black crosses. When guarantee they would work this way in the future.
that is the case, the relationship between price and the 60-day Note the Vzo strategy does not incorporate a stop-loss
Ema is ignored. Vzo rarely reaches +60 or ‑60 when Adx is methodology. Some technicians avoid using a stop-loss when
less than 18. swing trading, on the grounds that it hurts more than it helps.
When the Adx is less than 18, buying signals are issued These technicians exit a long position when their strategy issues
when: a sell signal, and they manage risk by adjusting their position
n The Vzo crosses up from below ‑40 to above -40

Copyright © Technical Analysis Inc.

Stocks & Commodities V. 29:5 (16-23, 28): In The Volume Zone by Walid Khalil and David Steckler
INDICATORS

position size. Other technicians will not enter any trade with-
out a stop-loss. There are pros and cons to both sides of the
argument, so you have to make that decision yourself.
There were numerous buy signals on Gld after June 7,
when Adx once again fell below 18 and the Vzo rose above
15. Sell signals (not shown) occurred when the Vzo closed
below ‑5.
Swinging with the VZO
Conservative swing traders might want to see the Vzo fall
to ‑40 or rise above +40 before buying or shorting when the
Adx is below 18. The risk is that by the time the Vzo rises
or falls to those levels, the Adx will probably be above 18
so you would need to monitor the relationship between price
and the Ema before taking a directional trade.
Another possibility when the Adx is below 18 is to buy or
write option straddles or strangles. A low Adx means vola-
tility is low. These neutral option strategies are used when
you believe the underlying security is stable and you don’t
think it is going to make a large price move. An Adx move
above 18 would be a signal to consider exiting the straddle
or strangle.
Next month we will introduce a similar, complementary
indicator: the price zone oscillator (Pzo).
Walid Khalil, Cfte, Mfta, is a member of the International
Federation of Technical Analysts (Ifta) and chief technical
strategist at Premiere Securities, Cairo, Egypt. He teaches
technical analysis at the Egyptian Society of Technical Ana-
lysts (Esta).
David Steckler, JD, is an investment advisor with
Global Investment Solutions, and is a past president of the
American Association of Professional Technical Analysts
(Aapta).
Suggested reading
Edwards, Robert D., and John Magee [2007]. Technical
Analysis Of Stock Trends, 9th ed., W.H.C. Bassetti, ed.
Amacom.
Granville, Joseph E. [1969]. Granville’s New Key To Stock
Market Profits, Prentice Hall/Simon & Schuster Profes-
sional Publishing.
Murphy, John J. [1999]. Technical Analysis Of The Financial
Markets, New York Institute of Finance.
S&C

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