Examples For Short-, Mid- & Long-Term Traders
When you look at the big volume surges shown in the following examples, ask
yourself what could possibly have caused all this extraordinary volume activity
and how might this affect the S&P 500 index. Quite simply, the market can react
in one of two ways: either continue along its current path or reverse course and
head the other way. Index values will always (sometimes immediately,
sometimes with a delay) react to volume surges, and the greater the magnitude of
a surge (or series of surges), the stronger the ensuing reaction.
(The many complex reasons why sudden volume surge take place are beyond
the scope of this article).
Example 1: Remember last year, when the long market downtrend
finally reversed and switched to a steady up-trend?
Again, a volume analysis chart provides us with fresh insight. Three volume
surges (two large ones in July and October 2002, as well as a smaller VMA peak
in February 2003) correspond with a distinct long-term trend change for the S&P
500. You could argue it was prompted by the outbreak of the war in Iraq.
However, our volume analysis indisputably demonstrates that that index "was
ready" to move up, given the large buildup of volume to the price downside, as evidenced by
the two very significant volume surges. It could also be argued that the new
uptrend actually began on October 10, 2002 and that the January 2003 move to
retest the recent lows was just a mid-term correction of the new up-trend.
Example 2: Do you
remember the market action in March 2004?
On this 30-day chart, you can clearly establish that each
major volume surge was followed by an index reversal.
Example 3: Fig. 4 shows that the discussed relationship
between volume surges and index reversals applies equally well to the
short-term, not just to the mid- and long-term. Note how each volume surge
coincides with an index reversal point.
Trading remains an inexact science, or perhaps more fittingly,
an art. Every trader knows that no system or analysis technology is 100%
perfect, and neither is volume analytics. We have just touched on the topic
briefly here, yet the examples provided should have given you at least an idea
of the benefits this proven and refined methodology could bring to your trading.
If you would like further information about this
topic, please refer to our Chart School.