Basic Points

• Absorption happens when volume (number of trades taking place) disappears into limit orders (liquidity) and the price does not move.
• If there is enough liquidity available to absorb a large amount of trading volume, then this is called exhaustion.
• If the volume that is pushing a trend along is exhausted, then this logically would prompt a high-probability reversal at that level.

Intermediate: Volume vs Liquidity

If volume is able to overcome liquidity standing in its way (volume > liquidity), then it bursts through to less favorable price levels. On liquid securities, this is always how price moves–aside from overnight gaps/halts or offers dancing around in empty volume. Price moves from providing liquidity (sitting on limit orders) but only from market orders or marketable limit orders (limit orders bought above the ask or sold below the bid). 

Advanced: Absorption in Technical Analysis

Absorption pertains to stealth accumulation (large and extended buying campaigns) or distribution (large and extended selling campaigns). Cashflow is stealth when there is a steady stream of large orders, but the spot price (of the underlying) never moves because liquidity is not disrupted beyond the current ask or bid. If a heavy amount of stealth buying is detected, then this means that there could be a very large and patient accumulation campaign underway, and vice versa for distribution. And if that is the case, then, patient or not, they will likely lift up the price over time as a bullish flow (or sink it if there is strong stealth distribution). 

A couple indicators which can help identify these flows are the CVD (Cumulative Volume Delta) and the OBV (On Balance Volume). The CVD is for example available in Bookmap or NinjaTrader, and the OBV is available on many broker charting platforms such as thinkorswim.