With the current rally progressing on lower volume, I thought I would take a moment to look back at a few historical market tops – or prior to deeper pullbacks – to see how volume behaved just prior to the top.
Let’s see five historical peaks in the Dow Jones Index and pay special attention to the trend of volume prior to these peaks. Each chart was created with TradeStation and you can click to zoom-in on the chart.
I’ll let the charts speak for themselves as a reference instead of commenting on each individual chart.
In all cases, we saw some sort of “trailing off” or decline in the ‘trend’ of volume prior to the absolute market peak.
When the final price high came, it did so on lower absolute volume as well – no chart above shows the absolute high of the rally taking place on the highest daily or weekly volume as shown on the scale.
This is a complement post to my prior “How Else Can We Interpret Recent Volume Activity but be Bearish?“.
Looking at this development from a different – more statistical/research perspective – Rob Hanna of Quantifiable Edges recently showed results of his historical testing on rising prices on declining volume in his post “Low SPY Volume Could Signal a Pullback.”
In this post, he references two of his recent studies on higher prices on declining volume – both of which had bearish undertones and results.
As a caveat, there’s never a guarantee of anything in the market, but if history is any guide, we need to treat the market with utmost caution right here, especially from the bullish side.
Corey Rosenbloom, CMT
Afraid to Trade.com
Follow Corey on Twitter: http://twitter.com/afraidtotrade