Volume Based Technical Analysis
Bullish and Bearish Volume Accumulation
Bullish and bearish volume accumulation are among the volume characteristics that you can receive from the analysis of volume. This parameter does not predict trend changes. In addition, it does not tell where the stock, index or market is going. What it reveals is how relatively much money was invested in a stock, index or market or withdrawn. Also, in technical analysis, bearish and bullish volume accumulations are used to define how strongly a stock, index or market is overbought or oversold.
If you take a look at SBV Oscillator, Chaikin Money Flow (CMF), and Volume Accumulation Oscillator (VAO), you will see that the direction of these indicators reflects whether money is coming into the analyzed stock or index or coming out of it. You might say that the trend of these indicators reflects the mood/sentiment and changes in these indicators' trend would reflect changes in the mood/sentiment and predict possible price trend reversals. The green and read areas of these indicators (the areas between the indicator line and the zero line) reveal bullish and bearish volume accumulation. Bullish and Bearish volume accumulation do not predict changes in the sentiment regarding a stock or index, but shows how strongly the analyzed stock or index is overbought or oversold.
Only volume-based technical indicators can give you the overbought and oversold levels. For example, technical analysis states that when Stochastics moves below 20, it indicates an oversold condition and when it moves above 80, it indicates an overbought condition. However, Stochastics does not reveal how strongly this overbought or oversold condition is. Volume, on the other hand, shows how many shares were transferred during a specified period of time. Indicators that use volume can show how strongly a stock or index was oversold during a decline or overbought during an up-move. So, the volume based-technical studies show not only when the stock or index is overbought or oversold, but also how strongly it is overbought or oversold.
As mentioned above, green a red areas of the SBV Oscillator, Chaikin Money Flow (CMF), and Volume Accumulation Oscillator (VAO) show bullish and bearish volume accumulation. Green areas reflect bullish volume accumulation and the bigger the green area is, the more overbought the stock or index is. The red areas reveal bearish volume accumulation and the bigger those red areas are, the more that the stock or index is oversold. For instance, if a stock declined by 2% on low volume, you might see a small red SBV Oscillator area and say that this stock is lightly oversold. In another case, the same stock declined by 2% again, but on much greater volume. Since the SBV Oscillator formula takes into account volume, the red SBV Oscillator area would be much larger if indicating more strongly an oversold stock's condition. This is logical because the same 2% decline occurred on a greater volume (more shares were sold).
While Bullish and Bearish volume accumulation do not predict mood changes and changes in the price trend, it helps to see when an analyzed stock or index is predisposed to changes in the mood. The other application of Bullish and Bearish volume accumulation is the evaluation of the strength of a possible reversal price movement. The larger and more prolonged in time that volume accumulation is, the more that the stock, index or market is overbought or oversold and the stronger is the reversal movement that can be expected.
Chart 1: The S&P 500 index with SBV Oscillator, Chaikin Money Flow (CMF)
and Volume Accumulation Oscillator (VAO)
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