Volume Analysis

Volume Based Technical Analysis

Long-term Technical Analysis (Trading System)

We define a long-term trend as a broad market trend that commonly persists for up to several years. No matter what timeframe you trade - the short-, the mid-, or the long-term - our position is that you should always know about the market's prevailing long-term direction.

Why should you care about long-term market analysis?

• Most high-dollar high-volume traders, mutual funds, banks, and investments firms adopt a long-term investment horizon - they therefore rely on long-term market technical analysis;
• Although many mid-term traders are not long-term oriented, they can still benefit from knowing where the market is likely headed over the long-term;
• In order to correctly time their short-term trades, short-term traders also stand to benefit from a viable mid- and long- term market outlook.

Best VMA settings for long-term market analysis:

An analysis of a long-term trend is best based on the following chart settings:

• A 10-year view with settings for the volume moving average (VMA) ranging from 40 to 60 days;
• A 5-year view with VMA settings ranging from 25 to 40 days;
• A 2-year view with VMA settings ranging from 10 to 25 days.

Our research indicates that a 5-year view with a VMA setting of 25 or 30 days is best suited for long-term analysis.

What to look for

The analysis of volume surges is at the core of our proprietary technology. At its most basic level, surges in the volume patterns of a security indicate a sudden increase in trading interest. We will not delve into the topic here, but any number of factors could prompt a significant surge in trading activity: news, earnings releases, and numerous other corporate, political, or economic events. The important thing to remember is that the exchange of a large number of shares (from one group of investors to another) can lead to changes in the supply / demand balance. The greater the magnitude and duration of a volume surge, the greater the likelihood that the supply / demand balance will be altered over the long-term. By studying the volume patterns of an entire index (i.e., a basket of many securities as opposed to just a single stock), you can see this wholesale exchange of shares occurring for entire sectors - or even at the level of the broad market. This process of transferring huge numbers of shares often precedes key market reversals (index turning points).

Remember:

• After a lengthy trend run up, the appearance of a protracted volume surge indicates that a significant number of high-priced shares have been transferred between groups of investors. This situation frequently precedes key index reversal points where the market subsequently turns down.
• After a lengthy run trend run down, the appearance of a protracted volume surge indicates that a significant number of low-priced shares have been transferred between groups of investors. This situation frequently precedes key reversal points where the market subsequently turns up.

A significant volume surge that is clearly visible on a 5-year chart may indicate a highly oversold / overbought market - whatever the case may be. It may reflect a market that is ripe for a long-term trend reversal. A closer analysis of such a volume surge will let you anticipate when the market is likely to reverse.

In analyzing volume surges, we generally look at the following aspects:

• How extensive is a surge (i.e., what is its magnitude)?
• How prolonged is it (what is its duration)?
• How far along an established trend and how far away from a previous key index turning point does it occur?

A few further important notes.

Below, we list some further points you should keep in mind when analyzing long-term market trends:

• Significant volume surges have the potential to drive large-scale index reversals and initiate new trend moves. These are NOT the surges one sees on smaller timeframes - such as one-day charts - but rather dominant surges formed by a process of accumulation / distribution that may stretch over a period of up to several months.
• Frequently, the peaking of a large volume surge does not lead to an instantaneous index reversal, particularly on higher timeframes. Directional index changes often occur only after a prolonged sideways move. Such trading patterns indicate accumulation or distribution - whatever the case may be - which slowly establishes a change in sentiment, preceding an actual index turnaround;
• In analyzing the potential impact of large volume surges, we tend to place less emphasis on volume surges that appear near the beginning of a new trend. Far more important are those surges that materialize further along a well-established trend - such volume surges are far more likely to lead to significant index reversals and affect trends;
• During a long-term up-trend, one or several large buying volume surges would be required in order to reverse the market to a mid-term downtrend, but comparatively smaller selling mid-term surges would already suffice to maintain and reinforce an existing uptrend. The opposite applies to long-term down-trends;
• Different timeframes may provide different perspectives and thus yield varying market outlooks. For instance, a volume surge that appears selling on a 6-month chart might be considered buying on a 2-year view.
• A significant volume surge that stands out on a 6-month chart may be barely visible on a 2-year chart view, although it may contribute to the building of a more significant and prolonged volume surge. Keep in mind that volume analysis over shorter timeframes is based on the selection of lower VMA settings - these emphasize surges of shorter duration. Conversely, when you review surges on 2- or 5-year charts, you are looking at a "volume summary" that stretches over more extended periods of time. An analysis that remains focused solely on 30- or 60-day charts will only reveal the short- and mid-term volume picture, but it will not allow you to correctly assess the volume patterns unfolding over higher timeframes (i.e., over weeks and months).
• It is a characteristic of buying volume surges that they are not always as pronounced and clearly visible as selling volume surges. Buying volume surges may show smaller magnitudes yet persist over longer periods of time (i.e., show a greater duration).

NEXT: Long-Term Trading System

By V. K. for MarketVolume.com