We define a long-term trend as a broad market trend that
commonly persists over several years. No matter what timeframe you
trade, the long, mid, or the short-term, you should always be aware of
the market's prevailing long-term direction.
The following example reviews the volume events that led to a long-term
reversal on the S&P 500 index (between July 2002 and March 2003).
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Chart #1: |
Example of a long-term market reversal. S&P 500 index.
2003 - 2004. 5-year chart. |
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Chart 1 shows a number of large volume surges between 2001 and 2005.
The two volume surges during the price decline at points A and B are mid-term
volume surges; accordingly, they are best analyzed on a smaller timeframe (i.e.,
a chart view spanning less than 2 years). We mention these surges here for
comparative purposes and will refer to them when discussing the
volume surges seen at points C and D.
In terms of magnitude and duration, the surges at points A and B
remained well below the volume surges seen at points C and D. Not
surprisingly, the market's reaction to these first two surges was comparatively
muted, remaining restricted to a 10-15% index move over 2 - 6 months. In
contrast, the surges seen at points C and D were of much greater magnitude and
duration and accordingly had a more significant market impact. These two surges
unfolded over a 4-month period (from late June 2002 to the end of November 2002)
and prompted a major reversal of the long-term trend. The resulting market
reaction is still ongoing and is now in its 3rd year - a new long-term uptrend
was established that has taken the S&P 500 index higher by over 20% (as of May,
2005).
At point E, we see a mid-term surge that occurred near the start of
the new long-term uptrend. This volume surge interrupted the progress of the new
uptrend for roughly 2 months. Compare this to the volume surge during the price
advance seen at
point F, which took place much further along the by then well-entrenched
uptrend. This particular surge stalled the S&P 500's advance for more than 7
months (i.e., between January and August 2004) and prompted an index decline of
more than 6%. Because we are dealing with mid-term volume surges in this
particular example, an analysis would ideally be made on a somewhat lower
timeframe (i.e., using charts with less than a 2-year view).
Summary:
If significant volume surges persist for more than a
month, they have the potential to affect market trends over the long-term.
Sizable volume surges that appear after a long run has taken place point to a
large number of shares being transferred from one group of market participants
to another. It is precisely near such inflection points that the market tends to
become "overbought" or "oversold".
