Volume Spikes

Index values will always (sometimes immediately, sometimes with a delay) react to volume spikes, and the greater the magnitude of a spike (or series of spikes), the stronger the ensuing reaction. (The many complex reasons why sudden volume surge take place are beyond the scope of this article).

Example 1: Fig.1 shows the beginning of the long term up-trend that started in January - February 2003. It could be argued that the new uptrend actually began on October 10, 2002 and that the January 2003 move to retest the recent lows was just a mid-term correction of the new up-trend. You can see a huge volume surge in the August and October of 2002 that indicated coming market reverse.

Fig 1:



Example 2: On this 30-day chart, you can clearly establish that each major volume spike was followed by an index reversal.

Fig 2:



Example 3:Fig. 3 shows that the discussed relationship between volume spikes and index reversals applies equally well to the short-term, not just to the mid- and long-term. Note how each volume spike coincides with an index reversal point.

Fig 3:



Conclusions

Trading remains an inexact science, or perhaps more fittingly, an art. Every trader knows that no system or analysis technology is 100% perfect, and neither is volume analytics. We have just touched on the topic briefly here, yet the examples provided should have given you at least an idea of the benefits this proven and refined methodology could bring to your trading.