In turbulent times in the market, traders can be swept up in the movement of price and its emotion and forget that a powerful tool lies at their fingertips; you just need to remember to look.
Price is the most potent of confirmation tools when we analyse the market, this is where we make it or break it as a trader. So it’s easy to see why in choppy markets we can ignore other tools that may seem secondary like Volume.
Volume can lend support to a movement in price, it can also show a lack of confidence in a price movement. To recap, what is volume? Volume is simply a measurement in how many units are traded in a particular instrument over a particular time frame, generally each day.
We can look at the volume as signaling how much pressure or intensity is behind a movement in price. This can be used to confirm our view on the market, or to signal that a movement may be running out of steam. Its important to note that volume can be high on a day where price is moving up or down. So a high volume day does not necessarily mean that price will also go up. This can be a misconception that new traders can make believing that high volume means a bullish movement in price.
Lets look at a recent price movement in CBA.
In the area highlighted on this chart of CBA, the price movement in February was coupled with a noticeable increase in volume. This is supporting the idea that volume is fuelling the downward price movement. In a bearish move we expect higher volume on the down days, and a reduced volume on the up days. This would support the idea that market sentiment is bearish.
The next circled area of the CBA chart demonstrates the bullish effect. Price action has been fuelled by a steady increase in volume. The bullish sentiment on CBA then softened, price movement was more sideways and the price intensity in CBA was confirmed with a reduced trading volume on those days. This has led us to the last 3 days of this week, with increases in both price and volume, culminating in a large spike in volume on the last trading day of the week Thursday April 24, 2003.
This brings me to another way we can use volume. We look at the divergence of volume and price. What I mean by that is where a previous high or low price is taken out on smaller volume. This can sometimes suggest a weak push through that price and that it may not be sustained. This is similar to Noel’s earlier article on False Breaks you may want to include volume as a filter in this case.
We can see that CBA is approaching some previous tops around $28.00. This price represents some strong resistance. So as technical traders if this price is broken we want to see it on strong relative volume, not less volume. This would give us confidence that we are not seeing divergence but good pressure behind the move above $28.00.
So this week will tell the story if $28.00 will prove too tough as a resistance point to break through, or if CBA has the pressure to break through that mark.
I know one thing, if CBA is to break and hold above $28.00 we will need to see some positive confirmation that volume is behind the bullish movement. Otherwise it may be just another false break.
Many technical analysts believe that volume precedes price, so taking the time to study volume and how it can work in your trading plan is certainly to your advantage.
Good Trading
Aaron Lynch