How Else Can We Interpret Recent Volume Developments as Bearish?

Nov 11, 2009: 5:07 PM CST

Looking inside the most recent short-term moves in the broader market, we see a stellar signal from reading volume alongside with price.

Using classic volume interpretation methods, we can only come to one conclusion – volume insights are sending a bearish non-confirmation signal as the market grasps at recent highs, and either volume is going to have to pick-up (increase) to keep this rally going… or else price is going to have to fall via the signals from the “Voices of Volume.”

Let’s look at the 15-minute SPY chart from late October’s sell-off to the present rally into fresh highs.


(Click for full-size chart)

Under classic volume analysis, we expect that “Volume Goes with Price.”

Meaning, watch upward moving volume to “confirm” a price move – whether up or down; and watch declining volume to “disconfirm” a price move (again, either up or down).

Thus,

Rising prices + Rising volume = Bullish (continuation)
Rising prices + Falling volume = Bearish (non-confirm / reversal)

Falling prices + Rising volume = Bearish (continuation)
Falling prices + Falling volume = Bullish (non-confirm / reversal)

You can read more about this in my “Volume Voices” page at the Education Center.

How do we overlay this information into the current chart above?

As price fell from its October 21st peak, volume rose during the entirety of the down/selling phase into the $103.50 lows (from the $110 highs).  That serves as a Bearish Confirmation that sellers are ‘picking up urgency’ to sell and hints – from volume’s voices – that lower prices are ahead.

In yet another “Bear Trap” (see my prior posts:

New S&P 500 Highs Forecast by Sprung Bear Trap

A Look at the 12 Recent Failed Short-Sale Signals in the SP500

… prices did indeed manage to rally to new recovery (fresh 2009) highs… but each day brought lower relative volume, serving as a Bearish Non-Confirmation of higher prices.

The fact that price is rallying so strongly on lower volume is bearish in nature, and is a warning sign to anxious buyers on the sidelines who feel they may have missed this rally.

Now would not be the time to “panic in” to the market, if the voices of volume are correct.

Does that mean that prices are going to fall off a cliff from here?  Not necessarily – but it is a yellow light that serves as a warning – a non-confirmation, or a sign of ‘weakness’ that price alone is not telling you.

Always look ‘under the hood’ of price alone to see what else might be happening.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

16 Comments

16 Responses to “How Else Can We Interpret Recent Volume Developments as Bearish?”

  1. davea1 Says:

    love you work but completely disagree with the falling prices + rising volume + Bearish. Other 3 statements are correct however. This is an old wives tale and any slight back testing would disprove that heavy down volume is bearish. People puke at the bottom . Jason gophert and rob hanna have looked at this and found it untrue in there research. I have also found it to have no significance in my own testing

  2. blues Says:

    Unfortunately I have to agree with davea1… Tell me, ever since March, have low volume rise EVER been bearish? I mean ever since March, we've always go up on low volume and down on big volume, but that didn't stop market go from 666 to the current level. Just the the most recent price/volume action for example, down days in late Oct was huge compare to the past week's low volume rise, YET we are higher now then before, aren't we? Maybe this is how bears (me included) get suck in. This idea of low volume rise IS bearish is such a BS and have been proven WRONG over and over again! Bear trap after bear trap! ALL BEARISH pattern formation, volume/price action, candle stick pattern HAS RENDER USELESS and is just one BIG BEAR TRAP AFTER ANOTHER! So I would stop putting attention to low volume rise… is this thought (or hope) that have been plaguing and killing all the bears…

  3. blues Says:

    Another thought, maybe this is the “new” bull market… the “true” climb wall of worry? Where people would be scare of going in long but somehow market rises and then on any sign of weakness people rush for the exit… So when the “true” bear market returns, we probably will see low volume down day triumph heavy volume up days…

  4. Corey Rosenbloom, CMT Says:

    Thanks Dave,

    Volume is one of those things where it can send puzzling signals – sometimes inconsistently.

    These volume grids comes straight from the CMT coursework and are generalities.

    The exception would be volume spikes “puking the lows at the bottom” but what we're looking at is the broad-based trend as opposed to one or two bars.

    It could be the character of the market has changed in recent history – a lot has changed in a post Lehman/Bear Stearns world and perhaps the 'classic' way to analyze volume is a casualty of this new environment.

  5. Corey Rosenbloom, CMT Says:

    Blues,

    I can't help but wonder if the market is being pushed up like a rubber band – and when the 'classic' form of analysis comes back, that the market will snap-back to so-called normalcy.

    If we're in a new world where volume and market internals don't matter – then that is a radical departure that leaves us in uncharted territory for sure.

    Six months of price action does not negate decades of market activity and history – and I've been one to point out these 'bear traps' and the upward bias.

  6. Corey Rosenbloom, CMT Says:

    The market certainly is climbing a wall of worry!

    Point of reference – there was a negative volume divergence that preceded the 1987 market crash.

    I'll try to go back and show some of these 'pre-crash' periods and note volume with an open mind.

  7. blues Says:

    Corey, I certainly hope you are right on “pre-crash” periods, please do show us that… and I certainly hope you mean we are about to crash… 😛

    But seriously this rise has certainly been a painful one for bears… regarding to the volume though, here are some example periods:

    Aug 28th – Sept 2nd: Huge volume

    Sept 3rd – Sept 10th: low volume (compare to the prior drop) and yet it triumph the prior fall. Yes the volume picked up after the 10th, but notice it actually topped… So it seems that after the huge volume fall, people were scared yet market was able to overcome that with low volume, this is the part that puzzle me the most… and when we actually overcame the Aug28-Sep2 drop people felt it was safe to get in and looking for much higher so the volume increased, but then that was actually the height of the swing and then later on all of them got slaughtered by the drop from Sept 23rd to Oct 2nd… notice one thing interesting, the drop actually stopped around the initial low volume rise from Sept 3rd to Sept 10th! So who ever bought those at low volume actually become support… you would think other way around where high volume up should've been the support… So these low volume “guys” (GS/JPM?) actually are in control of the market? Another thinking is that when people got afraid, GS/JPM (just as example, but I truely think GS/JPM are using our tax money to manipulate this market higher) actually got in and bid the market up. While bidding up the market up to a point (usually the breakout point), they squeeze the short and get “eager” long in the market and then sell into those people while they suffer…. but when it get to their (GS/JPM) initial buy point, they comes in with the money they made and bid the market up again…

    Another example:

    Sept 29th to Oct 2nd: huge volume down
    Oct 5th to Oct 12th: low volume up, AGAIN, triumph high volume down… WTF?!

    Same thing happend again afterward, Oct 14th to Oct 15th, squeeze those bears and eager long into market! Higher volume up day which marks the high of the swing and then Oct 21st to Oct 30th, killed all those suckers (and again huge volume)!

    Now that lead to past 7-8 trading session, AGAIN, low volume triumph prior high volume sell off… Gee… talk about rinse and repeat… now are we going to see another high volume squeeze up day? If so, maybe that's going to be the top again where GS/JPM sell their share into those suckers?

    I mean how else you explain (I think it was shown in Zero Hedge) that GS had like 90% (or higher?) winning ratio of late (I think it started after March)… Tell me, which group of trader have that type of trading skill (90% winning ratio) without some insider help (ie government)?

  8. blues Says:

    “then that is a radical departure that leaves us in uncharted territory for sure.”

    Ya that “uncharted territory” is call GS/government territory or better yet GS/Paulson/Geithner/Bernanky territory…

  9. blues Says:

    Or better yet, is called “kill the USD” territory where nothing matters as long as USD goes down, equity goes up… carry trade on full swing… USD=New Yen and U.S.A. = Japan 2.0

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  11. terlyn Says:

    Yesterday (Nov 11) Bob Pisani on CNBC, researching the volume issue, revealed that hedge funds had exited the market at the end of October with a 30% profit. That would coincide with the test of the 50-day MVA. Some mutual funds were entering the market, but he wasn't clear to what extent. That would certainly account for the drop in volume, and would also give some clue as to what percentage of volume the hedge funds represent (if they are the only ones exiting).

    I believe volume retains its importance for a bull or bear market. This rally has been a countertrend rally on no economic fundamentals except for bottom fishing and the low interest rates. That is why there has not been conviction and why it is not a bull market, in my opinion.

  12. terlyn Says:

    Yesterday (Nov 11) Bob Pisani on CNBC, researching the volume issue, revealed that hedge funds had exited the market at the end of October with a 30% profit. That would coincide with the test of the 50-day MVA. Some mutual funds were entering the market, but he wasn't clear to what extent. That would certainly account for the drop in volume, and would also give some clue as to what percentage of volume the hedge funds represent (if they are the only ones exiting).

    I believe volume retains its importance for a bull or bear market. This rally has been a countertrend rally on no economic fundamentals except for bottom fishing and the low interest rates. That is why there has not been conviction and why it is not a bull market, in my opinion.

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