Volume Analysis

Volume measures the number of shares traded and provides crucial context for price movements. It confirms trends and signals potential reversals. [DEFINITION] Volume: The total number of shares or contracts traded during a specific period, measuring the intensity of trading activity. ### Why Volume Matters [KEY] Price shows what happened, but volume shows how significant it was. High volume moves are more meaningful than low volume moves. **Volume confirms trends:** - Rising prices + rising volume = strong uptrend - Rising prices + falling volume = weakening uptrend (warning) - Falling prices + rising volume = strong downtrend - Falling prices + falling volume = selling pressure fading ### Volume Patterns to Watch **Climax Volume:** Extremely high volume after an extended move often signals exhaustion and reversal. [EXAMPLE] A stock rises 50% over 3 months. On the last day, volume is 5x normal and price reverses sharply. This "blowoff top" often marks a significant peak. **Breakout Volume:** Valid breakouts should have above-average volume. [TIP] A breakout on low volume is suspicious—it may fail. Look for volume at least 50% above average to confirm a breakout. **Divergence:** When price and volume move in opposite directions, watch out. [WARNING] Rising prices with declining volume is a classic warning sign. The rally is losing steam as fewer buyers participate. ### Volume Indicators **Average Volume:** Compare current volume to the 50-day average. - 2x average = significant interest - 3x+ average = exceptional interest **On-Balance Volume (OBV):** Cumulative volume indicator that adds volume on up days and subtracts on down days. Rising OBV with rising price = confirmed trend Rising OBV with flat/falling price = accumulation (bullish divergence) [EXERCISE] A stock breaks above resistance at $50 on volume of 2 million shares. The 50-day average volume is 500,000 shares. Is this breakout likely valid? |ANSWER| Yes, very likely valid. Volume is 4x the average (2M ÷ 500K), showing strong conviction behind the breakout. High volume breakouts are more reliable than low volume ones. ### Volume in Different Contexts **Earnings announcements:** Volume naturally spikes; compare to other earnings days **Consolidation periods:** Volume typically contracts before big moves **Trend days:** Strong trends show consistent volume throughout the day [SCENARIO] You notice a stock dropping 5% with volume at only 60% of average. The next day, it rises 2% with volume at 200% of average. What does this suggest? The selling was light (weak conviction from sellers) while the buying was heavy (strong conviction from buyers). This is bullish—demand appears stronger than supply.