ASX Charting Course

Chapter 30

Volume

Volume is not really an indicator as such, but it does provide valuable and often vital information about the state of the market.

Volumes are reported from the exchanges. During the session tick volume is reported, but for pit sessions the actual volume is not provided until the following day. On electronic exchanges, such as we have in Australia, volumes are reported in real time. Nevertheless there will still be adjustments made by the exchanges at the end of session.

How to Use

During a bull market phase of rising prices volumes tend to increase as price rises and decreases during corrections, either retracement type corrections or sideways, consolidation type corrections.

Conversely in a bear market, where the trend is predominantly down, volume will tend to be higher during the down moves than during the corrections.

At tops and bottoms trading volumes will often increase.

We can also use volume in conjunction with open interest applying some simple rules.

If prices are rising and volume is rising along with increasing open interest the market is said to be strong and the up trend should therefore continue.

If prices are rising, but volume is declining with open interest also waning, the market is said to be weak and therefore unlikely to continue. In fact this situation would indicate a market likely to turn down.

If prices are falling and volume and open interest are increasing, then we can say the down move is strong and likely to continue.

If prices are falling and volume and open interest are also falling, then we can say that the down move is weak and therefore the market is unlikely to continue lower.

Divergence is also a valid concept to determine whether a market is likely to turn or not. Divergence between price and volume, that is. If the market were to make a new high price, but volume fails to match the volume of the previous high, it implies that the up move is weaker and therefore unlikely to continue.

Conversely when the market is making new lows if volume doesn’t match the previous incident then we can say that fewer sellers were willing to commit to lower prices.

In the example below you will notice that the volume was increasing at the beginning of the bull market during January and February. The correction in early March saw the daily volume decline, as we would expect if the market was going to continue. The rally resumed mid March however daily volume figures failed to replicate those of the up move prior to the correction, providing a clue to the market’s potential to turn. The high peaks made in March and April demonstrate divergence as volumes failed to exceed or even match that of the price peak in late February. Price did make a retracement as a result, back to the value trading at the time of the correction in early March.

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