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Let us examine what lies behind the calculations in Figure 4. The blue columns represent the volume that has been accumulated during a twenty day accumulation window only in the case where the closing price is in the upper quantile (set at the 90% level). The actual volume that is registered has a positive signed value where the volume occurred in conjunction with a strong close (i.e. above the 0.5 closing bias threshold) or a negative value when the volume occurred in connection with a weak close (i.e. below -0.5 in terms of closing bias). If the closing bias value lies between -0.5 and 0.5 then a zero volume value is recorded. Both positive and negative amounts will therefore appear in the accumulation and the sign of the net volume figure will show on balance the degree to which upper quantile price activity is conforming to strong closes. Looking at Figure 4 it is also apparent that there are several periods when there is an absence of any blue columns as the prevailing price is failing to register in the upper quantile. The red columns are constructed according to whether the true range values observed for each session are above the upper quantile value for true range (also set at the 90% level). Once again the values accumulated will tend to show whether range expansion is occurring in conjunction with strong closes or weak closes since this is the basis on which the sign value is attributed to the volume.

When the red and blue columns in Figure 4 are aligned and above the zero volume level this conveys three separate but related items of useful information 

• The closing price is behaving relatively well (i.e. in the upper quartile of its recent performance). 
• The closing position bias is relatively strong (i.e. the closes are in the top quarter of the daily range). 
• The expansion of range is, on balance, associated with strong closes.

A lot of valuable information is revealed by these conjunctions and provides an assurance that the bullish price action is being well supported by other below the surface dynamics that are constructive. 

Alternatively when the red and blue columns are least aligned and the red columns are moving below the zero volume line the underlying dynamics are revealing the following

• The closes are relatively weak which is causing more negative volume to be accumulated than positive volume.
• The range expansion is, on balance, being associated with weak closes where the position of the close is near the bottom of the daily range. 
• If there are no blue columns this shows that price has been performing poorly for at least the number of sessions in the accumulation window.

Now that the overview has been established it will be helpful to drill down to a micro analysis of a key turning point for NEM which is the late January 2006 sell-off which can be clearly seen on the price chart (Figure 3) and which is also marked as point C in Figure 4.

To highlight this excellent trading opportunity on the short side we have zoomed in on the relevant time period in Figure 5 to show how the red columns were descending in a clear downward trend during January 2006 and slipped below the zero line during the last few days of January. This is in marked contrast to the behaviour during December 2005 where there is positive alignment of the two lines.

Newmont Mining (NEM) : Quantile Based Volume AnalysisFocus on divergences leading up to sell-off in February 2006-5000000050000000 01/12/2005 21/12/2005 10/01/2006 30/01/2006 19/02/2006 Cumulative Signed VolumeUpper Quantile Price based Signed Volume Upper Quantile True Range Based Signed VolumeThe red line moves below zero on February 1st 2006 after a prolonged period of alignment with the blue line in December and January

(click to enlarge)

The positive alignment during December 2005 demonstrates that when range was expanding it was associated with strong closes and this was closely tracking the accumulation of positive volume based on the bullish price action. As we move through January we find that the opposite begins to emerge which is that on days when the true range values are in the upper quantile there is, on balance, more negative volume being registered which reflects the fact that the closing bias on these sessions was in the lower reaches of the session’s true range. The signed volume associated with price performance in the upper quantile is still revealing that there is a bullish tone to the price development but the underlying volume and money flow dynamics are diverging. The red column drops below the zero point on the vertical axis on February 1st 2006 which coincides perfectly with the price top before the February correction which brought NEM down to $48 for more than a 20% correction.

From the different scenarios that have been outlined it becomes possible to develop a framework for timing turning points and this can be more or less precisely tuned. As a very simple rule we could short NEM whenever the red columns drop below zero and the blue columns have been above zero for at least the ten previous sessions. Using this simple rule would have produced the series of sell signals which are marked in Figure 6. In each case the signal was followed by rather significant price declines and the timing of the turning points is remarkably accurate.