A Quick Look at Volume Clues on the Dow Jones

Aug 25, 2008: 12:35 PM CST

We’re picking up on a relatively bearish volume pattern in the Dow Jones and S&P Indexes.  On downswings in the context of the larger downtrend, we are seeing increased volume to the downside and light volume when price mounts counter-rallies (up-swings).  Let’s look at these patterns and see what they might mean.

A little background before viewing the charts.

Classic technical analysis uses volume to confirm price strength, or hint at developing weakness.  The easiest way to interpret volume is the following:

Rising Prices, Rising Volume (trend) = Bullish (confirmation)
Rising Prices, Falling Volume = Bearish (non-confirmation)

Falling Prices, Rising Volume = Bearish (confirmation)
Falling Prices, Falling Volume = Bullish (non-confirmation)

According to James Dalton (of recommended Market Profile books Mind over Markets and highly acclaimed Markets in Profile), “Price advertises opportunity, time regulates opportunity, and volume measures the success or failure of the auction process.”  These books are amazing in terms of how to quantify or conceptualize price/auction structure and derive trading opportunities from value.

With that in mind, let’s look at the Dow’s Daily and Weekly charts (with a bit of bonus material beyond the volume).

Dow Jones Daily:

One can clearly see the non-confirmation of higher prices on the daily Dow, meaning that as prices have mounted a counter-swing rally up, volume has declined (in a trend-style fashion) almost every single day.  In fact, the highest volume reading of the last two months was made at the lower end of the price range, and the lowest volume is being recorded now.  This is extremely similar to what occurred during the prior counter-rally into May, which also terminated on low relative volume (as we’ll see).

Buyers and funds are not confirming these higher index prices with increased participation, meaning that it feasibly would be easy to imagine a downturn in the market due to lack of interest at these higher prices, such that price would have to auction lower to find value.

As a bonus, note that price is at resistance via the 50 day EMA and the trendline drawn from the July 15th bottom.  Price is currently failing a test of these levels.

On to the weekly chart.

Dow Jones Weekly:

We are able to see the volume illustrations clearer on this time frame.  Notice that on virtually every down-draft in the market recently, volume picked up, as lower prices were attracting more participation (selling led to more selling), and whenever the market mounted a counter-swing up (keep in mind the swing and impulse labeling, as the market is now in a confirmed downtrend), volume was flat or trailed off to lower levels, as higher prices were not confirmed.  Further selling occurred after these counter-rallies, which was preceded by non-confirmations in volume.

Price is also experiencing a failure test of the 20 month EMA and 200 week (roughly 4 year) SMA.

This volume observation is not going unnoticed by the larger traders and funds, I assume.  Continue to watch the current market closely for signs of strength or weakness, as well as further non-confirmations.

5 Comments

5 Responses to “A Quick Look at Volume Clues on the Dow Jones”

  1. rafa Says:

    Hi, quick question on technicals. I’m not a trader yet, but I see 2 head and shoulder formations (one within the other). The first “neck” is at around 13000 and from there to the peak (14000) is 1000 points. If you extrapolate that down it goes to 12000 (actually is 11750 the swing low). In the second and bigger one the “neck” coincides with the previous low at 11750, and if we extrapolate to the peak (to 14000) the expected swing low would be 10000, am I assuming this correctly? is this something that is done regularly by traders? I would appreciate any feedback
    regards
    Rafael

  2. Corey Rosenbloom Says:

    Rafael,

    Correct – the first H&S pattern with neckline at 13,000 is complete and has met its price objective (measuring rule from top of head to neckline). We got a reversal (back up) after that price objective was complete.

    I see what you’re saying (I think) about the larger pattern, but the swings are not as clear or concise, but may still be there. That larger pattern does have a lower price projection if it were valid (or turns out to be valid). We’ll have to watch and see if this becomes the dominant pattern, and if so, it will be quite bearish.

    Good observation!

  3. Rafael Says:

    thanks for the rapid response, and thanks for keeping this blog so useful and informative.

  4. Don Da Mon Says:

    Decending Triangle forming on S&P and DOW since Aug 15th?

  5. blog.afraidtotrade.com Says:

    A quick look at volume clues on the dow jones.. Awful 🙂