Volume Called the Market
by R. Stuart Thomson
By going back to October 1986 we can better understand the market explosion that occurred in January
1987, thanks to our cumulative volume (CV) charts. (See "Cumulative Volume" in the June 1986 issue of
Stocks & Commodities.)
Starting in October 1986 and with some slow-down in December as the impact of the new Tax Reform
Act reared its ugly head, the technical picture steadily improved. Figure 1 shows how the Dow Jones
Industrials' cumulative volume broke out to a new high in September 1986, quickly retreated to a higher
low that same month, broke out to a sustained new high in October, and then made another new high in
December. Once the year-end finally arrived, the market was ready to spring into action.
The S&P Transports had failed to confirm new DJIA highs for months, and persisted in drifting lower
from April to July 1986. That was the bottom (Figure 2). Finally, in October, the S&P Transports
cumulative volume broke out to a new high right in tune with the action of the DJIA cumulative volume.
One of the technical indicators that stubbornly refused to confirm the new 1986 DJIA highs was the
NYSE Advance/ Decline Index (Figure 3). It made a high in April 1986, drifted lower into August,
rallied into November, and then made a final low on December 31, 1986. While it was failing to confirm
the Dow Industrials during all this time, one is struck by how shallow the pull-back actually was, and,
finally, when the turn came, it only took 21 trading sessions to go from its low for the year 1986 to a new
high in early February 1987.