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Why Low Trading Volume Is Dangerous at Trader’s Narrative

As a technical analyst, I normally look at price action exclusively but volume is undeniably, another important element of the market. I’m a bit reluctant to delve into the concept of volume because a lot of what is already out there is bunk.

In any case, here is an interesting chart of the recent NYSE total volume (5 day simple moving average) and the S&P 500 Index (SPX). It shows that, usually, when trading volume dries up the market tops out.

spx total volume analysis

Although it isn’t marked on the graph, I’m sure you’ve already noticed that the opposite seems to also be true: when volume screams higher, propelled by frenzied trading, more than not, we have an important floor put under the market.

The recent market condition did provide us with such a spike high in total volume, but it was short of previous ones in January 2008 and October 2007. As well, I’m a bit concerned that volume has dropped to a fairly low level already. On its own this wouldn’t mean that much, but it is one more addition to the already growing list of indicators blinking a caution sign.

For obvious reasons, the time around the end of the calendar year and the start of the new year has to be excused from this analysis. Furthermore, since total volume drifts slowly higher, comparing a time horizon longer than a few years gives us problems. As well, this isn’t a 100% reciprocal relationship, the “?” points out an instance where price continued higher, even after a period of very low trading volume.

There are more advanced ways of looking at total volume that would mitigate such structural short comings (for example, using bands and seasonally adjusted data) but I simply wanted to introduce the concept. You can run with it and report back.

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4 Responses to “Why Low Trading Volume Is Dangerous”  

  1. 1 Jeffery Bennett

    I have noticed that in the last several trading days the overall market volume has been very weak. Then just before the close a surge of volume comes in and extends until about 5 minutes after the close. I believe these are “sell on close” orders?

    Doesn’t this activity skew the actual volume reading for the day? Doesn’t it make the day look more active than it really was?

    Any thoughts would be GREATLY appreciated!

  2. 2 Herb Greenberg

    WE NYC screws are getting ready to crash the markets after ops exp next Friday

    WE have been manipulating the markets now for 2 years and it’s time for us NYC screws to make money on the down side


  3. 3 Gaz

    I am in no doubt these markets are manipulated particularly through spreadbetting firms. Basically it’s very hard for you to profit when u use spread bettings firms.

    Example.If your short on the market you would normally see a spike on the opening bell of the dow - trying to sqeeze u out so obvious.

  4. 4 Jimmy

    @Gaz , I use spreadbetting and used to think like that, but its just the market orders people have made that get rapidly executed on open that cause these spikes.

    I have found such nuances in the flow tradeable, provided you can guess the direction.

    I have also found that trading high volatility news announcements with directional betting can lead to very bad results with the markets often doing several U turns on non-farm payroll data. I such cases I have found extreme volatility profitable matched with the correct binary options strategy.

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