Volume Indicators Quotes

One of the aspects of volume analysis is an understanding of importance of volume based generated signals. In analysis of volume surges critical volume is considered a volume surge that most likely will lead to a strong trend reversal when the reversal movement is not short lived but prolonged in time.

The common strategy used to define which volume surge or volume based signal is critical is to compare the current volume and signal to the previous surges and signals. This strategy could be applied not gust to the volume based technical indicators but to other technical studies as well. The other strategy of defining critical signals (that could be used in junction with the first one) is consulting higher timeframes to define the parent trend stages.

You have to remembers that the main definition of technical analysis is comparing the current market/stock trend characteristics to the historical with purpose of the predicting possible trend development. Before making a trading decision a professional technical analyst and trader always consult history and higher timeframe.

Understand Critical Volume Signals by consulting the history

Comparing the current volume based signals to the historical signals is one of the simplest way to define the strength of the current signal, i.e. to define if the current signal is critical.

In case with Stochastics when you trade 20 and 80 levels, it is difficult to evaluate current signal in relation to the historical signals because all signals are generated at the same level. The only thing you can do is to check how long Stochastics moved below 20 or above 80 and define how strongly oversold of overbought stock, index or market is. When it comes to the volume based signal in technical analysis, with most indicators, you can compare how strong signal is (how big volume surge is) and how big bearish or bullish volume accumulation is associated with this signal.

It is easier when you may see big volume surge over prolonged period of time and volume based signal is strong and could be considered as critical signal (volume) which could lead to a strong trend reversal. However, in some cases you may see a row of smaller signals which are not strong enough to be considered as critical signals. As a rule in this case you see weaker reversal reaction on each of these signals. Yet, at some point cumulative volume accumulation of the small signals could reach critical point at which those small signals could be compared to one strong signal. Furthermore, a reaction on a row of small signals could be similarly strong.

The small volume signal (surge) could be considered critical  if cumulative volume accumulation of the previous small signal with the current is closed to the volume accumulation witnessed in the previous strong reversal.

On the S&P 500 chart below you may see an example of signals generated by the SBV oscillator (Selling Buying Volume Oscillator). The first signal is strong - you may see how deep SBV Oscillator dropped below zero and you may see how big bearish volume accumulation (big red SBV area) there was. As a result the S&P 500 rallied strongly up - strong reaction on the strong signal. After that you may see a row of small signals - the bearish volume accumulation (red SBV areas) is small. Each of these signals pushed the S&P 500 index higher, yet the reversal was not very strong. At some point cumulative bearish volume accumulation of the small signals became approximately equal to the bearish volume accumulation seen in case of the first strong signal. The last volume signal in the row of small signals could be considered as critical signal because it brought cumulative bearish volume accumulation to the critical level. As a result, after that small signal, the S&P 500 made another strong rally up which was similar to the up move after the first strong signal.

Chart1: S&P 500 (SPX) chart with examples of critical signals.

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