Turn up the volume

Here's what the market's volume says about stocks now.

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Keys to volume

  • Volume can be used to confirm the direction of a trend.
  • Investors can assess volume relative to recent data, an average, or a benchmark.
  • The S&P 500's trading volume suggests there is no clear direction for US stocks right now.

As stocks move reactively to the seemingly ceaseless palpitations of US-China trade talks, Federal Reserve actions, and the latest earnings results, market volume appears to suggest there is broad indecision as to the direction of the market trend. Here’s what volume for the US stock market is saying, and what to potentially look for in the coming months.

Volume is vital

Volume (or the lack thereof) can be a helpful piece of information in the trading process. For example, analyzing trends in volume can help you validate patterns if you are an active investor that incorporates charts and trends into your strategy.

Volume is simply the number of shares traded in a particular stock, index, or other investment over a specific period of time. For example, as of October 17, 2019, the most actively traded US stock, based on a 90-day average, was General Electric (GE) with an average of 60.5 million shares traded per day.*

From a chart analysis perspective, volume is critical. Indeed, technical analysts believe that volume precedes price; to confirm any trend, volume should increase in the direction of the trend.

For instance, if a stock were to increase from $23 to $25 on high volume relative to the recent trend in volume for that stock, technical analysts would consider this to be a more sustainable bullish trend (i.e., the stock could keep going up over the short term) than if the same price increase were to occur on relatively low volume. If a stock were to decrease from $25 to $23 on relatively high volume, technical analysts would consider this to be a more sustainable bearish trend (i.e., the stock could keep going down over the short term) than if the same price decrease were to occur on relatively low volume.

Price moves made on low volume may be said to "lack conviction" and could be viewed as being less predictive of future returns.

What volume is saying now

You can tell when volume is high or low for an index, stock, or other investment by comparing it to another time period (such as previous days, weeks, or months, depending on your investing time frame), an average, or some other benchmark. You should also consider seasonal differences in absolute volume amounts as well as volume trends.

Consider the chart below, which shows the average daily volume for the S&P 500. The top half of the chart shows the daily price of the S&P 500 and the bottom half shows the corresponding daily volume.

In October 2018, US stocks turned bearish. In the early stages of this bearish trend change, volume increased significantly relative to the prior weeks and months (see chart above). According to volume analysis, this would be considered confirmation of the bearish trend. From peak to trough, the S&P 500 lost roughly 560 points in late 2018—a 19% loss.

Since the nadir of the selloff in late 2018, the S&P 500 has recouped all that territory, plus a bit more. But trade wars, global growth concerns, and other factors appear to have caused stocks to stall over the short term. Looking at the chart above, the S&P 500 has moved sideways since July, ranging from 2,840 to just over 3,000. Over that same period of time, volume has not increased, as it tends to do in the fall season, and has actually declined a little from spring levels. This lack of volume, coupled with the sideways moving market, might suggest a broad level of indecision over the short term.

Volume patterns and indicators

For a wide range of chart patterns, volume is essential. For instance, 2 technical trading patterns that incorporate volume include the head and shoulders and flag and pennant patterns:

  • In a head and shoulders pattern, volume usually decreases with each successive peak. If it does not, a trader might not expect the reversal pattern to complete. If volume does decrease with each peak and the pattern completes, the bearish breakout (i.e., a move lower) should then occur on increasing volume.
  • In flag and pennant patterns (short-term patterns completed in 1 or 2 weeks that are initiated by sharp and nearly straight-line moves), volume usually decreases during the pattern. If it does not, the pattern may not continue as expected. If the pattern completes, the breakout should then occur on increasing volume.

There are also some technical indicators that use volume, rather than price, as the central input. The ARMS Index, for example, measures relative volume in advancing stocks versus declining stocks. A value below 1 for this index suggests bullish sentiment and a value above 1 indicates bearish sentiment.

On Balance Volume (OBV) is another indicator that incorporates volume. OBV tries to detect momentum by providing a running total of volume, showing when volume is flowing into or out of a stock or other security. OBV is used to confirm price trends and spot divergences. An upward-sloping OBV would be used to confirm an uptrend, while a downward-sloping OBV might confirm a downtrend. Both OBV and the ARMS Index are available in Active Trader Pro®.

Watch and listen

Of course, the key drivers of the market over the short and long term remain earnings and other fundamental factors. The US-China trade talks will likely persist as a short-term trend driver. However, it may be possible to tune out much of the other noise and look to volume, along with additional signals, for evidence of what stocks might be up to next.

Next steps to consider

Find new investing ideas and get up-to-the-minute market data.

Learn what you need to know before trading the market.

Learn about more technical indicators and how they can help you trade.

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