Technical Analysis : Understanding Volume

Many of our readers have asked for more information on volume, so we decided to publish a complete series on volume over the next four weeks.  This series is aimed at giving you fundamental understanding of volume attributes and behaviors.  Each week in this newsletter, we will add new information about volume that builds from the previous weeks.

Volume in the market is as important as fuel to your car.  Price does not move without buyers and sellers. To help in understanding typical volume and price behavior, post these notes beside your computer and learn to identify the different volume behaviors as they occur on your charts. By understanding volume, it will help you unlock profits you might have missed before.

Normal Volume Behavior:

• Volume is highest before congestion (e.g. channel, pennant flat, triangle, etc.)
• Volume is lowest as it moves deeper into congestion
• Volume increases with a VALID breakout of congestion and then SUBSIDES as the trend begins.  (Look for the last Haweye Pivot being taken out.)
• Volume increases in major reversals
• Volume goes with the overall trend and dries up on the counter trend; i.e. volume should move with trend strength (trend dots are up and on an angle greater that 45%).
• On double or triple top/bottom formations, Volume should be lower on the second double top/bottom formation showing lack of selling. Then volume will pick up and a trend will be established. If it goes into congestion, then it should slow down.

Unusual Volume Attributes which show a DIRECTION of price because volume isn’t behaving normally:

Congestion Areas:

• If heavier volume appears at the low end of congestion area, buying is being supported and prices tend to go up after breaking out of the upper price resistance level.
• If heavier volume appears at the higher price level in the congestion area, then there are more sellers than buyers.  Prices will eventually decline from the higher support area of the congestion zone.
• Volume should increase during the breakout then subside as the trend begins to form.  However, if volume stays high after the breakout and prices move too strongly, then the breakout will not be valid and prices will move back into congestion until fair value has been established  then continue in trend (in other words  price has got ahead of its self and it requires attendant volume to confirm trend direction.)
• If price retraces after a breakout from congestion  on high volume, and bounces off the outside edge of congestion, and then volume picks up again, this is a valid breakout.
• Volume should be in the direction of the breakout.  However, if volume does not confirm the direction of the breakout, then prices will likely go in the opposite direction.  Remember, normal volume breakout increases with the breakout. Therefore, if you see a breakout with low volume, anticipate entering in the opposite direction as price cannot continue in this direction on low volume.

Volume Spikes are sudden and abrupt rises in volume (not just an increase in volume but a significant and abrupt increase in volume).   Volume spikes are normally easily identifiable on a chart because they stand out when compared to previous volume bars.

Large volume spikes at the top of markets should be accompanied by very little upward price movement at the end of the move.  This is what foretells the end of the advance.  If you get volume spikes with large or comparable price movement, then the price could continue upwards.  The key is price hitting a resistance line or seeing a small range bar on high volume.  The small range bar shows that there is resistance (or support in the case of large volume after a decline).

If you are in a trade and notice high volume bars without  advances in prices, as this is generally an indication of an impending reversal because the buyers (or sellers in downtrend) are drying up.  Additionally, when you see Wide Bars or multiple violent price swings with a volume spike, this indicates that the price will typically reverse very soon.

Upside spikes are always followed by heavy downward price pressure because the buyers dry up.  Downside price reversals in stocks usually go into congestion whereas overall market crashes result in action similar to an upside spike i.e. a reversal.  If you are already in a trade then you should be looking to exit on these spikes/crescendos because this is where price is going to reverse against you.

Remember that the large volume spikes at tops should ACCOMPANY very little upward price movement AT THE END OF A MOVE.  This is what foretells the end of the advance.  If you get volume spikes with large or commensurate price movement, then price could keep going.  So the key is price hitting a resistance line or a small range bar(s) on high volume.  The small range bar shows that there is resistance (or support in the case of large volume after a decline).

Circumstances of volume crescendos:

Price trend	Price trend	Subsequent Price
Before Volume Crescendo	While Volume Crescendo Builds	Direction
Rising	Up, accelerating	down
Rising	breaking down	down
Flat or congested	breakout to upside	up
Flat or congested	breakout to downside	down
Falling	accelerating downward	up
Falling	reversing up	up