How to Listen to the Voices of Volume

11/13/2009 12:01 am EST

Focus: STRATEGIES

Corey Rosenbloom

Founder and President, Afraid to Trade

Looking inside the most recent short-term moves in the broader market, we see a stellar signal from reading volume alongside with price.

Using classic volume interpretation methods, we can only come to one conclusion: Volume insights are sending a bearish non-confirmation signal as the market grasps at recent highs, and either volume is going to have to pick up (increase) to keep this rally going, or else price is going to have to fall via the signals from the “voices of volume.”

Let’s look at the 15-minute SPY chart from the late-October selloff to the present rally into fresh highs.

chart
Click to Enlarge

Under classic volume analysis, we expect that volume goes with price, meaning, watch upward-moving volume to “confirm” a price move (whether up or down), and watch declining volume to “disconfirm” a price move (again, either up or down).
Thus:

Rising prices + Rising volume = Bullish (continuation)
Rising prices + Falling volume = Bearish (non-confirm/reversal)

Falling prices + Rising volume = Bearish (continuation)
Falling prices + Falling volume = Bullish (non-confirm/reversal)

How do we overlay this information into the current chart above? As price fell from its October 21 peak, volume rose during the entirety of the down/selling phase into the $103.50 lows (from the $110 highs). That serves as a bearish confirmation that sellers are picking up urgency to sell and hints—from volume’s voices—that lower prices are ahead.

In yet another “bear trap,” prices did indeed manage to rally to new recovery (fresh 2009) highs, but each day brought lower relative volume, serving as a bearish non-confirmation of higher prices.

The fact that price is rallying so strongly on lower volume is bearish in nature and is a warning sign to anxious buyers on the sidelines who feel they may have missed this rally.

Now would not be the time to panic into the market if the voices of volume are correct.

Does that mean that prices are going to fall off a cliff from here?  Not necessarily, but it is a yellow light that serves as a warning—a non-confirmation, or a sign of weakness that price alone is not telling you.

Always look “under the hood” of price alone to see what else might be happening.

By Corey Rosenbloom of AfraidToTrade.com

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