V.9:7 (259-263): Analyzing Volume For Consolidations And Reversals by Thom Hartle

Analyzing Volume For Consolidations And Reversals by Thom Hartle

Markets move from one price level to another as trends. Once a trend has been established, technicians tend to continually analyze the market searching for clues about the current status of the trend. Is the trend beginning to weaken? Will the trend be reversed? Or will the market consolidate and then resume the trend? A market that has had a sustained advance will typically enter into a trading range. How can you ascertain whether the trading range is a consolidation or a reversal? Analysis of the volume and the price action is the key.

In the futures market, when a buyer and a seller agree on a price, a contract is either created, transferred, or liquidated. Each time this process is completed there is an increase in the daily volume by one contract. The larger the volume is for a day's trading, the more buyers and sellers have either established new positions, long or short, or liquidated old positions. The most active days are usually accompanied by fundamental news that affects traders' and investors' opinions about the near-term direction for the market. For example, an economic news release with positive data for a market will bring about a wave of buying, driving prices higher. Occasionally, the good news that triggered the higher prices is really the last hurrah for the market, which ultimately trades to lower prices. In retrospect, it appears as if the more astute traders took profits into the higher prices generated by the good news.