Volume Indicators

We define a long-term trend as a broad market trend that commonly persists over several years. No matter what timeframe you trade, the long, mid, or the short-term, you should always be aware of the market's prevailing long-term direction.

The following example reviews the volume events that led to a long-term trend reversal on the S&P 500 index (between July 2002 and March 2003).

Chart #1:	Example of a long-term market reversal. S&P 500 index. 2003 - 2004. 5-year chart.

Chart 1 shows a number of large volume surges between 2001 and 2005.

The two volume surges during the price decline at points A and B are mid-term volume surges; accordingly, they are best analyzed on a smaller timeframe (i.e., a chart view spanning less than 2 years). We mention these surges here for comparative purposes and will refer to them when discussing the volume surges seen at points C and D.

In terms of magnitude and duration, the surges at points A and B remained well below the volume surges seen at points C and D. Not surprisingly, the market's reaction to these first two surges was comparatively muted, remaining restricted to a 10-15% index move over 2 - 6 months. In contrast, the surges seen at points C and D were of much greater magnitude and duration and accordingly had a more significant market impact. These two surges unfolded over a 4-month period (from late June 2002 to the end of November 2002) and prompted a major reversal of the long-term trend. The resulting market reaction is still ongoing and is now in its 3rd year - a new long-term uptrend was established that has taken the S&P 500 index higher by over 20% (as of May, 2005).

At point E, we see a mid-term surge that occurred near the start of the new long-term uptrend. This volume surge interrupted the progress of the new uptrend for roughly 2 months. Compare this to the volume surge during the price advance seen at point F, which took place much further along the by then well-entrenched uptrend. This particular surge stalled the S&P 500's advance for more than 7 months (i.e., between January and August 2004) and prompted an index decline of more than 6%. Because we are dealing with mid-term volume surges in this particular example, an analysis would ideally be made on a somewhat lower timeframe (i.e., using charts with less than a 2-year view).

Summary: If significant volume surges persist for more than a month, they have the potential to affect market trends over the long-term. Sizable volume surges that appear after a long run has taken place point to a large number of shares being transferred from one group of market participants to another. It is precisely near such inflection points that the market tends to become "overbought" or "oversold".

NEXT: Up/Down Volume