Volume is often called the fuel that drives price movements. Analyzing volume patterns alongside price action provides crucial confirmation for timing signals and helps distinguish genuine breakouts from false moves.
Volume and Price Relationships
Rising prices on increasing volume confirm the strength of an uptrend. Rising prices on declining volume suggest weakening momentum. Heavy volume on down days indicates selling pressure, while light volume on pullbacks suggests healthy consolidation.
On-Balance Volume
On-Balance Volume (OBV) creates a running total of volume, adding volume on up days and subtracting on down days. OBV divergences from price often precede trend changes. When OBV makes new highs ahead of price, it signals accumulation and potential breakout.
Volume Spikes and Climax Patterns
Extremely high volume days often mark turning points. Selling climaxes, characterized by very high volume and sharp declines, frequently mark market bottoms. Blow-off tops, where prices surge on extraordinarily high volume before reversing, often signal market tops.
Practical Volume Analysis
Compare current volume to the 50-day average volume to gauge whether interest is above or below normal. Pay special attention to volume patterns at key support and resistance levels, as high volume breakouts are more likely to be sustained than low volume moves.