Importance of Volume in Technical Analysis
In the science of Technical Analysis,
Volume plays a role which is as
important as any other basic indicator. An increase in
the volume in conjuction with Stock price moves adds
strength and momentum in the direction of the move. It
reflects the market's confidence that the uptrend will
continue in force, or its pessimism that the downtrend
will.
For the market, declining volumes as the market
rises is supposed to warn the end of a BULL MARKET.
Likewise, sharp increase in volumes resulting in Selling
Climax, signals the end of a BEAR MARKET.
An increase in abnormal volume can alert investors to
coming price movements, Up or Down,
before it becomes obvious to the overall market.
Therefore, the market axiom "Volumes
Precedes Price."
Historically, the majority of BULL MARKETS have
originated with atleast two days within two-month period
where upside volume is atleast nine times greater than
the downside volume. Investors who track volume and spot
the two-day Exceptional Upside Indicator can out-maneuver
other investors and earn excess returns by positioning
themselves for the coming Bull Market.
Basic Volume theory includes
the following maxims:
*Increasing Volume with an advance
is Bullish
*Decreasing Volume with a decline is Bullish
*Increasing Volume with a decline is Bearish
*Decreasing Volume with an advance is Bearish
*A Market Top is imminent when heavy volumes occurs with
little or No Gain in the averages.
*Heavy Volume confirms the direction of price breakouts
from a Support or Resistance Zones.
*An increase on heavy volumes after a previous
substantial rally signals a "Blow Off" with an
impending top and Reversal approaching.
*Heavy Volumes accompanied by an accelrating drop in
prices confirms a "Selling Climax" and
impending price reversal after the panic selling subsides.
*Low volume periods after upward price reversals reflect
a Consolidation Phase before resumption of the Upward
Movement.
The Daily Volume Indicator measures extremes in the
Supply/ Demand relationship. If a Stock closes at the mid
point of its trading range for the day, the indicato
reflects no change. Closing Price above or below the
trading range midpoint show an increase or decrease in
the Daily Volume Indicator, respectively.
In constructing the Daily Volume Indicators, Technical
Analysts take into account the day's volume, closing
price, Distance between closing Price and the mid point,
and the Trading Range.
These are just the basic characterstics of the Volumes, these
must be read in conjuction with other commonly used
indicators before drawing up any conclusion.
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