Volume analysis

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A. Volume Quantity:

Volume tends to expand in the main direction of the trend. In a bull market, advances accompanied by increasing volume or declines on diminishing volume are taken to be bullish. Conversely, in a bear market, declines are accompanied by increasing volume and advances show diminishing volume. Volume should always be studied as a trend (relative to what has preceded).
                                                                                   - Richard Russell

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B. Volume Quality:

Unlike, for example, the 2003 rally where NYSE Up/Down volume ratio advanced in an upward slope with the rally, this 2009 rally especially the second part of it is showing a low quality by the evidence of the declining ratio and its 20DMA slope that doesn't fit (at least for now) as a start of a new bull market. It rather suggests a correction at best and who knows at worst. Also, both the up volume on its own is declining while the down volume is holding steady and refusing to make a new low. A bearish divergence in the face of rising prices.

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C. Volume comparison to previous bull markets:

It is 101 trading/investing lesson. Without volume, the move (up or down) is suspect. Click here and here for two well-thought and researched articles by William Hester from the Hussman fund about the topic. The first article noted that trading volume separates bull markets from bear rallies where bull markets have typically begun on strong volume after selling had become exhausted. New bull markets, whether at their inception or soon after, have a history of recruiting noticeable improvements in volume.

This rally lacks that important quality.

The second article not only update the first but also shows us that when you adjust the trading volume data for a handful of mostly lower-quality financial stocks, the picture of the 2009 rally gets worse. On a Phoenix-volume adjusted basis, NYSE share trading is at the lowest level in years. Healthy bull markets, even if not during the earliest days of a rally, will typically recruit growing amounts of investor interest and expanding levels of volume as prices rise. Expanding volume continues to be an important characteristic missing from this rally. Below is a chart from the second article. I enhanced it for you to get the point across quickly:

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Familiar durable bear-market bottoms stand out, like in 1982 and 1974. These rallies had strong returns that coincided with large bursts of trading volume during the first six months of the rally. There are a couple of examples, like 1998 and 2003, where bull markets had a good start on mediocre expansions in volume. But for the most part, in the cases where volume contracted the bull market beginnings have been uninspiring. More common is a strong increase in volume that coincides with gains of 20 to 25 percent during the first six months. It's clear that the 2009 rally is an extreme outlier in the dataset (far upper left corner), with above-average returns and a continued contraction in volume from the levels of trading in March.

Until next article and as always, I wish you as much as you wish for yourselves and even more.

GoodVibe
Mr. Lucky

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Comments

[Shakabra]

GV, awesome analysis (as usual) and strong argument for bear market to RESUME.

Thanks always! :-)

Shakabra

[Kirk]

I agree starting today... I follow cycles and the cycles top out between today the 6th and Monday the 11th.... They cluster in this time frame and therefore I bought a 1/2 position in SPXU at today's close and plan to scale into a full position by Friday.
KT

[rbharol]

Great post.

[phenix]

Great work, but this is a highly manipulated market by Fed.