MAILBAG QUESTION:

"what do you make of the market going up as much as it has in recent weeks on mostly low volume? I hear comments on low summer volume but with the market going higher anyway."

AND ...

Someone asked me to say something more about a situation where one of the indexes or a stock spurts higher, has a narrow-range sideways move for a few more days and then runs up again. A pattern I referred to (in recent Index Wrap commentaries) as a bull 'flag'. The highlighted pattern is seen my last chart below and it's the move that the Nasdaq 100 (NDX) is in. The money question is what does a flag suggest about a NEXT move?

MY RESPONSE:

They say about technical analysis that this way of looking at any market or at an individual stock only works with TWO things: price and volume. With futures contracts, there's also analysis of open interest, but that's not something we have to consider with stocks and the stock market.

Volume patterns are not always super obvious as to what they have to say about a price trend, up or down. With individual stocks volume of course is simply the number of shares that trade in the time frame being looked at; e.g., hourly, daily, or weekly. Volume can provide clues as to the intensity of a given price move. If, as you note, the overall market is going up but on low or relatively low volume, we can say first of all that there's not a lot of intensity or the widest participation. Nevertheless, prices are going up so we can't predict that the market is due for a big fall just because a rally, even a prolonged one, has a lot of traders and investors sitting out; lacking much bullish conviction, that kind of thing.

The situation of low bullish conviction or 'sentiment' is occasionally a characteristic of even prolonged advances. When everyone believes that the market is going to tank or have a barn burner of a rally, is often when, in fact, trend reversals will occur.

The study of volume is an ancillary indicator, not a primary one. PRICE movement is the primary consideration in a technical approach. If prices are going up I suggest that we BELIEVE that something is being reflected about the prospects for stocks. The market, whether in a relatively low volume situations or high volume ones, is a superb indicator of where the economy is headed and hence the prospects for earnings. Nevertheless volume is something to consider in any trend.

VOLUME INTERPRETATIONS:

1. LOW volume levels tend to be characteristic of periods of indecision occurring during consolidation periods; i.e., periods where prices move sideways or in a trading range.

2. HIGH volume levels can relate to markets that are topping out and where there's levels of bullishness that are unrealistic; periods of extreme bullish sentiment.

3. HIGH volume levels are also common at the beginnings or new trends OR during periods of panic type selling that occur before market bottoms.

4. VOLUME can also help determine the health of an existing trend. A 'healthy' uptrend will typically have higher volume on upward legs or just on up days. Strong up trends will tend to see volume diminish or dry up on pullbacks. There's a saying that "volume 'follows' the direction of the trend". A strong downtrend will tend to see higher volume on declines and lower volume on corrective rebounds.

EXAMPLES:

With Apple Computer (AAPL), volume trends pretty much relate to the price trend. On the far left, daily trading volume was falling over the period when AAPL was locked in a trading range relating to point 1 above.

When the stock took off volume begin to pick up also. The volume trend was 'confirming' price action. When AAPL experienced a pullback in March-May, volume initially surged (profit taking and panic type selling) then fell off again. The latest rally has seen AAPL's daily volume surging again. Volume and price action are pretty well in synch with the stock.

Relevant to the point (#3) on volume made earlier, there was a huge one-day volume surge at the end of Home Depot's (HD) decline into its mid-May bottom which is my next chart. A strong reversal like this on high volume could also be called a volume 'climax'; one marking the end of a correction. Here it was with HD which quickly regained footing in what was its strongly higher trend. This stock was in the right place for the current economy especially.

During the November (2011) to end-February period, you can see a number of high volume days when HD closed higher; days when the stock closed higher have volume bars in green. Down days, the volume bar is red.

Looking next at a chart of a stock in a steep decline for an example of a bearish price/volume pattern, which is that of Hewlett-Packard (HPQ). Volume was low on the Dec - Feb rebound, which is what can be expected in a rally within an overall major downtrend; a still weak stock. I don't expect much of a VOLUME surge on a rebound in a stock that's really struggling. There are only so many willing to buy the stock and volume is sluggish and low.

When HPQ went into a steep overall decline from mid-February one, and in keeping with what we tend to see in a dominant bear trend, most of the days in this volume chart (called a volume average indicator) show the red bars of a down day and more of the bigger volume days were on declines also.

FLAG PATTERN - MOST RECENT EXAMPLE WITH NDX

The Nasdaq 100 (NDX) index flag pattern is the spurt higher, followed by a few days of a narrow-range consolidation. It's a flag breakout when there's a subsequent strong move above the prior narrow price range.

With this second up leg I start anticipating a move toward 2850. A next up leg has a 'minimum' next upside objective to where you see it at the end of 'b'. A next advance is equal to the prior; this is the same as the so-called 'measured move' objective. It's often enough true that you can often trade off of it.


GOOD TRADING SUCCESS!