Combining Volume And Market Change by Anthony J. Macek Price and volume is a never-ending fount of ideas for judging the market's current technical condition. Here, S&C author and newsletter publisher Anthony Macek combines the magnitude and direction of price change with volume to produce a technical indicator. Numerous studies have been conducted regarding the importance of monitoring market volume to determine its effect on market performance and direction. Market analyst Richard Arms developed a technique, now known as the Arms index, that indicates whether the advancing or declining stocks are receiving more than a proportionate share of their volume. Perhaps just as impressive but far less publicized is Arms's Equivolume analysis, which uses volume along the X axis of a chart instead of time. Arms maintains that the market is a function of volume, not time, and should therefore be studied accordingly. Technician Joe Granville developed many systems for the analysis of volume, his best known being on balance volume, basically a running total of market volume. When the market finishes up for a specified period of time, volume is added, and when the market finishes down, volume is subtracted. This indicator has proved to be useful in determining intermediate-term market direction. Additional volume studies have been done by the venerable Arthur Merrill and others, so why add to the list? Because volume is the voice of the market, and the louder the market speaks, the more attentive we should be. For example, suppose the Dow Jones Industrial Average (DJIA) moves up 20 points in one day — a rather noticeable advance — but achieves this jump on the relatively light volume of only 140 million shares. Why should this action be regarded as important as when the market falls 10 points on a day in which market volume was heavy at 300 million shares traded? |
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