Charting April Distribution Volume in SPY and QQQ

Apr 11, 2012: 9:30 AM CST

For traders, assessing volume is important to defining the health or weakness of a trend in motion.

Volume should confirm price, meaning volume should rise during up-swings in a bullish uptrend… or else rise during down-swings in a bearish downtrend.

Let’s take a look at recent volume signals in the SPY and QQQ and learn a valuable lesson about volume.

First, let’s start with a prior volume-based chart from April 3rd’s membership report which sets the stage for our current market decline:

In the member reports, I had been highlighting the pattern of Distribution Volume throughout March that was continuing into April.

Let’s step back and define “Distribution Volume:”

After an uptrend, we look for any divergences to reveal a weakness or non-confirmation of price.

When volume DECLINES during rallies in price and INCREASES during down-swings or sell-offs in price, we would refer to this pattern as Distribution which warns of a potential market peak or deeper retracement at a minimum.

Throughout March, we had steadily higher actual prices (in the US Equity indexes) but volume was showing internal or ‘hidden’ weakness.

With the exception of March 14 – 16, we saw a steady pattern of declining volume on rallies which was met with increasing volume/participation on declines/retracements.

I emphasized these with color-codes as shown above – rallies are green and retracements against the prevailing bull trend are red.

Simply compare the progression or slope of volume relative to these rally or retracement phases in price.

The suggestion was one of caution at a minimum (don’t get aggressively long – tighten stops, be protective) or potential to play a reversal that developed with a price breakdown trigger under the rising trendline near $139.50.

Let’s now view an “After” Chart to see the current picture and how price resolved the “Distribution” so far:

After a pullback to the rising lower trendline into $139.50, price stagnated on the support level into the holiday week (where volume in general declined) and then broke sharply lower Monday morning (technically Friday morning after the Jobs Report).

Tuesday’s action was a powerful Trend Day that developed after a breakdown from a larger Distribution Volume Pattern.

You can see the spike in volume that developed on Tuesday’s Trend Day sell-off; this serves as a confirmation of bearish price action and suggests eventual lower prices are possible after an initial retracement.

The volume picture is the same in the NASDAQ’s popular QQQ ETF:

We’re comparing price and volume and the relative movements between them.

To phase the situation in terms of “IF/THEN” statements, we could simplify as the following:

  • IF Price rallies AND Volume increases in an uptrend, THEN we would expect the uptrend to continue (we would feel safe in buying retracements).
  • IF Price rallies AND Volume decreases in an uptrend, THEN we would be cautious and expect a deeper retracement or price reversal/breakdown.

The recent price activity from March to mid-April provides an excellent example of this classic technical analysis concept.

The reality is that divergences – and distribution volume patterns – can last longer than we’d expect, so we still need to wait for trigger signals from price itself (in the form of breakdowns).

However, it’s important to compare price and volume and using color charts like this can be helpful in assessing the probabilities of a prevailing trend continuing… or breaking down/reversing.

I explain these real-world concepts as they develop on a day-to-day basis with lessons and commentary in each night’s Idealized Trades reports for members which are geared both for educational content like this and discussions for levels/opportunities to watch for the very next trading day or even series of days.

Corey Rosenbloom, CMT
Afraid to

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Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

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  • simplycomplex

    So glad that you explained this well.  However, I have a couple of questions about the volume in the first chart.  I am sure my confusion stems from over thinking, but when I look at the volume, my eyes see a little differently so if you could explain how you draw your conclusion, that would be great.  For the third rectangle (1st decline/red box), I see flat volume because the first and third high volume red bars are of the same height.  Then the following price increase (4th rectangle, 3rd green), I see a volume increase as well.  My mind would put the start of that line on the large red volume bar around March 23rd and incline it up to the height of the black bar around the 27th.  Why do you have yours declining and ignoring the volume spike around the 27th?  
    I would also have the volume increasing on the 6th rectangle (4th green), starting at the lower black volume spikes up to the highest red spice around the 1st of April.  Can you explain this to me as well?  

  • Bswandby

    Really instructive analysis of price and volume

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