26 replies to this topic

[DonBart]

The most egregiously misunderstood concept in trading is the interpretation of volume in relation to price moves and what it means. I see it over and over again on message boards and this one is no exception. The best way to accurately understand volume is by analogy to electricity. Volume is like voltage and price is like current, and resistance is just the same in both cases. In electricity the more resistance in the conductive material the more voltage is required to create a given current. Same with the stock market, the more resistance to a given direction of price movement, the more volume required to move price by a given amount. Thus, a very bullish market should be like a superconductor where there is little to no reisistance to the current (trend). Hence, a BIG RALLY ON LOW VOLUME IS THE MOST BULLISH POSSIBLE SCENARIO, because it means there is no resistance to the uptrend (ie. no natural sellers). Conversely, the most bearish scenario would be flat to slightly up prices on heavy volume (that is a sign of heavy distribution pure and simple). The same rules work in reverse for bear markets. I don't know why the myth persists that prices rising swiftly on low volume is bearish. But those who buy into a propagate this myth are displaying a great deal of ignorance about how the market really works. Don

[SemiBizz]

Speaking of malpractice...Sure Don... then what happened here ?



?


http://bp2.blogger.c...600/nas1204.jpg

Sure was bullish though until it snapped.,

Edited by OEXCHAOS, 07 July 2007 - 01:55 PM.

[OEXCHAOS]

Semi, your chart didn't show. I think the blogging software or server won't let it be dynamically linked.

Mark

I love to short low volume rallies at resistance, or when the ARMS is high. I'll pass if voume comes in too.

Been doing well with that, day trading.

Mark

The most egregiously misunderstood concept in trading is the interpretation of volume in relation to price moves and what it means.

I see it over and over again on message boards and this one is no exception.

The best way to accurately understand volume is by analogy to electricity. Volume is like voltage and price is like current, and resistance is just the same in both cases. In electricity the more resistance in the conductive material the more voltage is required to create a given current. Same with the stock market, the more resistance to a given direction of price movement, the more volume required to move price by a given amount.

Thus, a very bullish market should be like a superconductor where there is little to no reisistance to the current (trend). Hence, a BIG RALLY ON LOW VOLUME IS THE MOST BULLISH POSSIBLE SCENARIO, because it means there is no resistance to the uptrend (ie. no natural sellers). Conversely, the most bearish scenario would be flat to slightly up prices on heavy volume (that is a sign of heavy distribution pure and simple).

The same rules work in reverse for bear markets.

I don't know why the myth persists that prices rising swiftly on low volume is bearish. But those who buy into a propagate this myth are displaying a great deal of ignorance about how the market really works.

Don

[TL Trader]

If I'm not mistaken Wyckoff would disagree. Although your analogy is (according to him) at least patialy correct.
A move up in price on excessive volume does often indicate it's meeting "resistance" (supply). Up moves on below average volume usually indicate a lack of demand, although you could also argue a lack of supply as well. Which may explain why they sometimes continue higher longer than many expect. The reason the low volume up move is not bullish longer term is the lack of demand. The most bullish moves up occure after a low or contracing volume decline followed by expanding volume as price starts to climb(expanding demand). When the move starts getting tired it can either coast higher (momentum) on contracting or low volume. Or meet selling on very high or excessive volume. Indicating the institutions/large traders are using the high volume to unload their large posistions.The most recent examples are the high volume sell offs in the indexes. Virtually all of the big down days over the past many months on way above average (excessive) volume reversed hard to the up side, often the next day. Indicating that "they"/ the smart money were buying the dip.

The tricks seem to be knowing what low, normal and excessive volume is for the instrument in question. And looking at what you see whitin the context of the underlying trend.

Edited by TL Trader, 07 July 2007 - 02:50 PM.

[Rogerdodger]

Semi, your chart didn't show.

Right click on: [Image Not Displayed]
Then select "View Image"

Ump, there it is...

Edited by Rogerdodger, 07 July 2007 - 02:59 PM.

[U.F.O.]

"a BIG RALLY ON LOW VOLUME IS THE MOST BULLISH POSSIBLE SCENARIO."

Challenge. This can be nothing more than Market Maker/Specialist manipulation of a specific stock. I will say that this theory does contain a bull component...The BS!

U.F.O.

[U.F.O.]

Challenge example. Anyone who lived through the 2000 NASDAQ collapse learned a thing or two. During the last, monstrous push to the all-time highs, volume fell to a cyclical low. Here's one example, INTC. I can go find another several hundred charts if this is insufficient. A rally on low volume is usually a negative sign...not a positive one. (1 chart)

U.F.O.

Edited by U.F.O., 07 July 2007 - 03:52 PM.

[rkd80]

But how can a stock continually keep going up on high volume? Eventually buyers will be exhausted, no? Is there an infinite supply of cash sloshing around? I suppose if you consider 401ks getting a neverending stream of cash from 9to5 types, then maybe there is. I always thought that reversals occur on huge volume, bear or bull. BUT.... that does not apply to challengin resistance. S&P has 3 tops to overcome and it cannot do it on less volume as that implies that enough 'current' is there and prices will collapse. Tim Ord's trading strategy revolves around this concept, although he calls it energy.

Edited by rkd80, 07 July 2007 - 03:57 PM.

[SemiBizz]

Don, unless you are just one of those bulls that likes to come around and negate any bearish stuff you read, then I suggest you get your charts out and prove your hypothesis... and our ignorance. Otherwise, unless you have anything else other than your bullish opinion to express, those of us successful traders who employ volume analysis in our forecasting and trading the market would appreciate if you would keep your bullish rah rahs to a minimum. If you can back it up, step up with your info and it will be severely scrutinized, by all means STEP RIGHT UP...

Edited by SemiBizz, 07 July 2007 - 04:04 PM.

[U.F.O.]

On high volume rallies the short sellers, once their asses quit bleeding, are forced to buy and cover, providing even more froth to the bull move. Market tops are lower volume affairs. MM's keep taking the market higher on fewer and fewer buyers until they get everyone in who even thought about being long the stock market. Then...guess what happens? Whistle for the floorboards. U.F.O.