Volume Based Technical Analysis
Long-Term Analysis Example (Trading System)
After the S&P 500 crashed 900 points down (from $1,575 to $666), the main question among the majority of the investor is how to be sure that this is over.
One thing great about volume is that volume can tell when the "Big Guys" are entering the market. Big institutional investors come to the market with big money. Retail traders cannot create strong enough buying demand to reverse the market up form a crash or a recession. Only big institutional traders have enough buying power to end a crash. Since these institutional traders buy and sell in big amounts, we have to watch volume to see when they are playing. Big volume surge means a lot of shares are changing hands - it means "Big Guys" are in the game.
On the S&P 500 index volume chart below you may see extremely strong volume surge to price down-side (see point A). When you see a strong volume surge to the price down-side after a strong decline, it mean a huge number of low-priced shares are changing hands. Volume is a 2-side transaction and this volume surge (point A on the chart below) tells us that
a strong wave of the Bullish traders came to the market and started to by low-priced stocks from selling in panic investors.
This was the first signal of a coming trend reversal. However, this is not the point when we may say the this is the end of a crash. At that moment, when price was crashing on extremely huge volume, you saw that the Big Guys entered the market, yet, you did not know whether they would be able to beat the Bears and stop the crash. During this time the S&P 500 continued to slide down. This tells us that
despite strong Bullish wave, the Bearish pressure (selling Supply) was still stronger. The new Bulls could not beat all the Bears selling in panic.
Then (see Point B on the chart below) price reversed up. At this moment, we still did not know whether it is just a bounce up or it is a bottom of a crash. However, when we check volume, we will see that current volume surge differs greatly from the previous volume surges recorder during the crash. Volume behavior changed - that means that sentiment among traders changed.
We had a strong volume surge in first half of October of 2008. We had another strong volume surge in the second half of November of 2008. After each of these volume surges, the S&P 500 reversed up and it was just a temporary bounce within a crash. The important characteristic of these volume surges is that they had strong volume to the price down-side and as S&P 500 reversed up, volume declined. As soon as we witnessed the decline in volume, the Bears were back by crashing the market further down. In those cases the new waves of Bulls were strong, yet, they were short-lived.
All the way during the crash, we had higher volume during price decline and smaller
During the bounce in March of 2009, a strong Bearish volume surge recorded in February of 2009 turned into a strong Bullish volume surge. In opposite to the previous strong volume surges, during the bounce in March of 2009, we did not witness a decline in trading volume (!!! very important). It tells us that
the current wave of New Bulls is strong and prolong in time. These Bulls not just crashed the Bears, they are able to sustain the high Bullish pressure for a long time.
In April of 2009 (point C on the chart below), we started to see decline in trading volume and price continued to move up - this was the final confirmation of a reversal from a crash. This reveals that
as the bearish pressure started to decline (resulted in drop in volume) the Bulls continued to dominate (price continued to advance) on the market.
From March of 2009, we witnessed radical change in volume behavior - we had stronger volume to the price up-side and weaker volume to the price down-side.
Chart #1: S&P 500, 4-year index volume chart.
When it comes to the analysis of the stock market crashes, recessions and long-term Bull markets, volume analysis is only one aspect of the entire picture. To confirm volume analysis it is recommended to check market Breadth and market volatility data. Decline in volatility confirms end of the market crash. Details of the long-term market Breath analysis could be found HERE.
NEXT: Volume Technical Analysis Tutorial
By V. K. for MarketVolume.com
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