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CHAPTER 7 - Basic Characteristic of Volume

Volume analysis provides important insights into crowd psychology and the strength of price trends. There are several key principles of interpreting volume: (1) volume typically goes with the trend, expanding in rising markets and contracting in falling markets; (2) rising prices accompanied by falling volume indicate a weak rally; (3) record volume coming off a major low signals a significant bottom. Analyzing divergences between price and volume trends can reveal early signs of trend reversals.

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KiMi MooeNa
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289 views

CHAPTER 7 - Basic Characteristic of Volume

Volume analysis provides important insights into crowd psychology and the strength of price trends. There are several key principles of interpreting volume: (1) volume typically goes with the trend, expanding in rising markets and contracting in falling markets; (2) rising prices accompanied by falling volume indicate a weak rally; (3) record volume coming off a major low signals a significant bottom. Analyzing divergences between price and volume trends can reveal early signs of trend reversals.

Uploaded by

KiMi MooeNa
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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CHAPTER 7

Basic Characteristics
Of Volume
Basic characteristics of volume
Almost everything that technicians use in plotting a specific security
involves either the price itself or a statistical variation on it. Volume can offer
a new dynamic in our interpretation of crowd psychology.

Therefore, analyzing
volume trends gives us a better understanding of how and why price patterns
work. In effect, the study of the characteristics of volume gives greater
depth to the weight-of-the-evidence approach described earlier.

Volume not
only measures the enthusiasm of buyers and sellers, but also is a variable that
is totally independent of price.
BENEFITS OF VOLUME STUDIES
Volume studies offer three major benefits:
1. When price and volume patterns are compared, it is important to
see whether they are in agreement. If so, the probabilities favor an
extension of the trend.
2. If price and volume disagree, this tells us that the underlying trend
is not as strong as it looks on the surface.
3. Occasionally, price action offers mild signs of an impending trend
reversal, but volume can throw up characteristics of its own that
literally shout this message. In such cases, a study that was limited
to price action would fail to uncover a really good and obvious
warning or opportunity.
PRINCIPLES OF VOLUME INTERPRETATION

The first and most important principle is that volume


typically goes with the trend. It is normal for activity to
expand in a rising market and to contract in a declining
one (see Figure 7.1).
In this sense, volume is always interpreted in relation
to the recent past.
We know that when prices move in trends, this does not
occur in a straight line. Instead, the price works its way up
and down in a zigzag fashion. Volume trends are similar. On
the left side of figure 7.2, for instance, the solid arrows
indicate an expanding volume trend and the dashed ones
declining trends.
The combination of rising volume and rising price is normal. It
indicates
that things are in gear. Such a state of affairs has no forecasting
value,
except to imply that it is likely that a negative divergence between
price
and volume lies ahead.
Volume normally leads price during a bull move. A new high in price
that
is not confirmed by volume should be regarded as a red flag, warning
that the prevailing trend may be about to reverse. In figure 7.3 the
price peaks
at point C, yet the average volume reached its maximum around point
A.
Rising prices accompanied by a trend of falling volume (figure 7.4) is
An abnormal situation. It indicates a weak and suspect rally and is a bear
Market characteristic.

When it is recognized, it can and should be used as a piece of evidence


Pointing to a primary bear market environment.

Volume measures
The relative enthusiasm of buyers and sellers.

When it shrinks as prices rise, the advance occurs because of a lack of


selling rather than because of sponsorship from buyers.
SOONER OR LATER, THE TREND WILL REACH A POINT WHERE
SELLERS BECOME MORE MOTIVATED.

AFTER THAT, PRICES WILL START TO PICK UP ON


THE DOWNSIDE.

ONE CLUE IS PROVIDED WHEN ACTIVITY INCREASES NOTICEABLY


AS THE PRICE STARTS TO DECLINE.

THIS IS SHOWN IN FIGURE 7.5, WHERE YOU CAN SEE


THAT VOLUME STARTS TO PICK UP AS THE PRICE STARTS A SELL-OFF.
SOMETIMES BOTH PRICE AND VOLUME EXPAND SLOWLY, GRADUALLY WORKING INTO
AN EXPONENTIAL RISE WITH A FINAL BLOW-OFF STAGE.

FOLLOWING THIS DEVELOPMENT,


BOTH VOLUME AND PRICE FALL OFF EQUALLY SHARPLY.

THIS REPRESENTS AN
EXHAUSTION MOVE AND IS CHARACTERISTIC OF A TREND REVERSAL, ESPECIALLY WHEN
SUPPORTED BY A ONE- OR TWO-BAR PRICE PATTERN (DISCUSSED IN SUBSEQUENT
CHAPTERS).

THE SIGNIFICANCE OF THE REVERSAL WILL DEPEND UPON THE EXTENT OF THE PREVIOUS
ADVANCE AND THE DEGREE OF VOLUME EXPANSION.
When prices advance following a long decline and then react to a level at,
Slightly above, or marginally below the previous trough, this is a bullish
Sign if the volume on the second trough is significantly lower than the
Volume on the first. There is an old saying on wall street, “never short
A dull market.” This saying applies very much to this type of situation,
In which a previous low is being tested with very low volume. Such a
Situation indicates a complete lack of selling pressure (see figure 7.9).
A downside breakout from a price pattern, trendline, or
moving average (MA) that occurs on heavy volume is
abnormal and is bearish sign that confirms the reversal
in trend (Figure 7.10).
When the price has been rising for many months,
an anemic rally (figure 7.11) accompanied by high
volume indicates churning action and is a bearish
factor.
Record volume coming off a major low is usually a
very reliable signal that a significant bottom has
been seen. This is because it indicates that
an underlying change in psychology has taken
place.
When volume and price expand at a sharp pace, but short of a
parabolic blow-off, and then contract slightly, this usually indicates a
change in trend. Sometimes this is an actual reversal and at other times a
consolidation.

This phenomenon is featured in Figure 7.13 and represents a temporary


exhaustion of buying power.

It is associated with several one- and two-bar price patterns, discussed in


later chapters. The example shows the price eventually selling off, but it
could just as easily have risen. All the volume crescendo is telling us is
that buyers are exhausted and we should expect a pause. When that
buying is exceptionally heavy, a more bullish extreme in sentiment is
indicated and is more likely to be followed by an extended period of
price erosion, as shown in Figure 7.13.
When the price experiences a small rounding top and
volume experiences a rounding bottom, this is a doubly
abnormal situation, since
price is rising and volume is falling as the peak is
reached. After the peak, volume expands as the price
declines, which is also abnormal and bearish. An
example is shown in Figure 7.14.
When the price volatility shrinks to almost nothing and
volume does the same, this indicates total disinterest.
When the situation is eventually resolved, this is often
followed by an above-average price move.

In Figure 7.15, for instance, price and volume fall to the


kind of levels where the slightest movement in either
direction will signal a dramatic price movement.

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