TA - Understanding Volume - Part 2

Understanding Volume – Part 2

Volume Spikes are sudden and abrupt rises in volume (not just an increase in volume but a significant and abrupt increase in volume).   Volume spikes are normally easily identifiable on a chart because they stand out when compared to previous volume bars.

Large volume spikes at the top of markets should be accompanied by very little upward price movement at the end of the move.  This is what foretells the end of the advance.  If you get volume spikes with large or comparable price movement, then the price could continue upwards.  The key is price hitting a resistance line or seeing a small range bar on high volume.  The small range bar shows that there is resistance (or support in the case of large volume after a decline).

If you are in a trade and notice high volume bars without  advances in prices, as this is generally an indication of an impending reversal because the buyers (or sellers in downtrend) are drying up.  Additionally, when you see Wide Bars or multiple violent price swings with a volume spike, this indicates that the price will typically reverse very soon.

Upside spikes are always followed by heavy downward price pressure because the buyers dry up.  Downside price reversals in stocks usually go into congestion whereas overall market crashes result in action similar to an upside spike i.e. a reversal.  If you are already in a trade then you should be looking to exit on these spikes/crescendos because this is where price is going to reverse against you.

Remember that the large volume spikes at tops should ACCOMPANY very little upward price movement AT THE END OF A MOVE.  This is what foretells the end of the advance.  If you get volume spikes with large or commensurate price movement, then price could keep going.  So the key is price hitting a resistance line or a small range bar(s) on high volume.  The small range bar shows that there is resistance (or support in the case of large volume after a decline).

Circumstances of volume crescendos:

Price trend	Price trend	Subsequent Price
Before Volume Crescendo	While Volume Crescendo Builds	Direction
Rising	Up, accelerating	down
Rising	breaking down	down
Flat or congested	breakout to upside	up
Flat or congested	breakout to downside	down
Falling	accelerating downward	up
Falling	reversing up	up