A Look at Declining Volume on Five Prior Market Tops

Nov 13, 2009: 2:57 PM CST

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

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  • indebtwetrust

    Very good post. I use tradestation too. Good suite of tools. How come you didn't include 2008 or the 2002-2003 periods?

  • Hi all. I'm new to this site. That's great work above. Really interesting. I completely agree with your findings.

    In terms of a crash, the charts, especially small time frames, look really strange. The minute bar charts sometimes look like monthly charts. I wonder if there is a connection with how big the bars are minute by minute and a crash. Is there a correlation?

  • That lock-limit candle and the subsequent red in Oct. 1987 is possibly the most beautiful candlestick I've ever seen on a chart.

  • rww13

    I am sorry but you can pull out any chart and do anything you want with it and show anything that you want. I can show you a linear regression channel that tells me we may back off to 9700 or so. Just as you can drag any bear or bull out on TV and they will tell you why (and have good reason) they think the market is going up or down. Eventually everyone will be right at some point.

    I found this page b/c someone (who has been telling me for months we were at the top) said here ya go this is why we are going down. No one knows what is going to happen no matter how much they study the history of charts.

  • Like momentum divergences, volume divergences are a leading indicator that must be combined with some other signal in order to time a short-entry, you can try to short a volume/momentum divergence and get totally pulverized by an extended wave 5, as these charts illustrate and as the NASDAQ back in the day demonstrated with utmost insanity (typically wave 5s add another 20 or 30% to the trend, but that one added another 100%).

    So, while you point has merit, these divergences are a consistently foreboding omen that this rally, at the very least, is not sustainable. Its just a question of how far and how long. How long are you?

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