Volume Based Technical Analysis
Volume Surge Classification
Volume surges are evaluated according to their magnitude and duration. It is vital to appraise each particular volume surge in this way before attempting to predict how it might impact future market direction.
A study of volume surges is best performed by reviewing their magnitude and duration on a variety of timeframes (chart views), for instance on a 1-day, 15-day, 1-month, 1-year, and even on a 5-year chart.
We categorize volume surges as short-, mid-, or long-term. We also classify intraday surges:
Intraday Volume Surges:
As the name suggests, intraday surges are volume surges relevant to the activity occurring within a single session. As a rule, these surges barely register on higher timeframe charts, such as 5-day charts with a 60-minute VMA. The effect of intraday surges on larger market trends tends to be minimal. They often result in a change of just a few index points; however, an analysis of such surges is particularly beneficial for futures traders who strive to achieve gains of several points from a number of day trades. In order to correctly analyze intraday volume surges, it is necessary to study the prevailing short- and mid-term market trends first, because these tend to dictate the magnitude of intraday volume surges. That is why we recommend traders analyze mid- and -short-term trends before attempting intraday scalps.
Chart #1: Examples of intraday volume surges. S&P 500 index. May 19, 2005.
Short-Term Volume Surges:
These are volume surges that potentially affect market trends over the short-term (i.e., anywhere from one to several days). Such volume surges typically persist from several hours up to a day and may induce short-term corrections that can last from several hours up to several days. An analysis of such surges is possible on various timeframes, starting with a 1-day period (where 1 bar = 1 minute) and proceeding up to a 60-day period (where 1 bar = 1 hour). You cannot see mid- and long-term volume surges on a 1-day chart because such surges are created through a process of accumulation that spans considerably more than a one-day period. That is why we recommend checking a short-term surge in different timeframes to determine whether it is part of a mid- or long-term volume surge.
Chart #2: Examples of short-term volume surges. S&P 500 index. November 19 - 29, 2004.
Mid-Term Volume Surges:
These are volume surges that potentially affect the market over the mid-term (i.e., from several weeks to several months). The duration of such surges is usually from one to several weeks. While you can discern such surges on a 2-year chart, they tend to be very small on that timeframe. It is therefore best to analyze mid-term volume surges using a 1-year chart view (where 1 bar = 1 day), using a 3-day VMA setting. You may also choose a 6-month view (where 1 bar = 1 day) and apply a 1-day VMA setting, or select a 60-day period (where 1 bar = 1 hour) with a 1-day VMA. Mid-term volume pikes are of course visible on shorter timeframe charts; however, it is best to determine their true size by placing them in the context of higher timeframes.
Chart #3: Examples of mid-term volume surges. S&P 500 index. October 2004 - May 2005.
Long-Term Volume Surges:
These are volume surges that have the potential to affect market direction over the long-term (i.e., for up to several years). Accordingly, such volume surges are substantial enough to figure prominently on 5-year charts (where 1 bar = 6 days) or on 2-year charts (where 1 bar = 3 days). Volume surge duration may be from one to several months. Long-term volume surges may also register on 1-year charts (where 1 bar = 1 day); however, on this timeframe, they will not display as one large volume surge but rather as a series of smaller surges separated by phases with low volume. The reason for this pattern is found that there are always low-volume days, which will be reflected on a one-year chart, because these charts represent each day as a single bar (in contrast to 2- or 5-year chart views).
Chart #4: Examples of long-term volume surges. S&P 500 index. July-December 2002.
In summary:
As noted, it is vital to assess volume surges properly in order to determine their potential to affect market trends. The best way to do this is to review each surge in several different timeframes in conjunction with a variety of VMA settings. Of key importance is also an awareness of the larger market trends (i.e., the direction of the parent trend). For instance, to assess the potential market impact of a mid-term volume surge, it is vital to know about the currently prevailing long-term trend. Accordingly, when analyzing short-term volume surges, an understanding of the current mid- and long-term market direction (trends) is just as important.