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In the science of
Technical Analysis, Volume plays a role which is as important as
any other basic indicator. An increase in the volume in
conjuction with Stock price moves adds strength and momentum in
the direction of the move. It reflects the market's confidence
that the uptrend will continue in force, or its pessimism that
the downtrend will.
For the market, declining volumes as
the market rises is supposed to warn the end of a BULL MARKET.
Likewise, sharp increase in volumes resulting in Selling Climax,
signals the end of a BEAR MARKET.
An increase in abnormal volume can alert investors to coming
price movements, Up or Down, before it becomes obvious to the
overall market. Therefore, the market axiom "Volumes Precedes
Price."
Historically, the majority of BULL MARKETS have originated with
atleast two days within two-month period where upside volume is
atleast nine times greater than the downside volume. Investors
who track volume and spot the two-day Exceptional Upside
Indicator can out-maneuver other investors and earn excess
returns by positioning themselves for the coming Bull Market.
Basic Volume theory includes the
following maxims:
* Increasing Volume with an advance is Bullish
* Decreasing Volume with a decline is Bullish
* Increasing Volume with a decline is Bearish
* Decreasing Volume with an advance is Bearish
* A Market Top is imminent when heavy volumes occurs with little
or No Gain in the averages.
* Heavy Volume confirms the direction of price breakouts from a
Support or Resistance Zones.
* An increase on heavy volumes after a previous substantial
rally signals a "Blow Off" with an impending top and
Reversal approaching.
* Heavy Volumes accompanied by an accelrating drop in prices
confirms a "Selling Climax" and impending price
reversal after the panic selling subsides.
* Low volume periods after upward price reversals reflect a
Consolidation Phase before resumption of the Upward
Movement.
The Daily Volume Indicator measures extremes in the Supply/
Demand relationship. If a Stock closes at the mid point of its
trading range for the day, the indicato reflects no change.
Closing Price above or below the trading range midpoint show an
increase or decrease in the Daily Volume Indicator,
respectively.
In constructing the Daily Volume Indicators, Technical Analysts
take into account the day's volume, closing price, Distance
between closing Price and the mid point, and the Trading Range.
These are just the basic characterstics of the Volumes, these
must be read in conjuction with other commonly used indicators
before drawing up any conclusion.
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