V.12:6 (235-239): Price-Volume Rank by Anthony J. Macek

V.12:6 (235-239): Price-Volume Rank by Anthony J. Macek
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Price-Volume Rank by Anthony J. Macek

Imagine receiving a warning when the market was likely to collapse or being alerted when one of your favorite stocks was about to rally. What if these signals came from analysis that was simple enough to do without a computer and took only a few minutes a day to update, using just two pieces of information found in virtually any newspaper? Is this a dream? Maybe not.

The old adage about keeping things simple applies even to the investment world. Methods of analysis such as polarized fractal efficiency and price oscillator divergences do a great job, but for those with neither the time nor the inclination to master the techniques necessary to monitor every blip and sputter that the market produces may be served just as well by noting only two very important market variables: price and volume.

To illustrate, examine what generally happens when the market as a whole, or even an individual security, moves in stages within a typical bull-to-bear investment cycle. At the start of a bull market, both price and volume tend to increase together. This confirmation, seen in the early stages of a market advance, is indicative of market strength. As the bull matures, volume tends to diminish, even though prices are still trending up. This divergence, where higher prices are not accompanied by higher volume, is usually indicative that a market top may be imminent. As prices peak and then begin their downward trek, volume generally increases as investors rush to dump their holdings. Later, as selling pressure subsides, the grip of the aging bear begins to weaken (point D), and we see diminishing volume even as prices continue to fall.

This lessening of downside momentum gives the opposite signal as in point B, as lower volume in the face of lower prices tends to signal that a market bottom may be approaching. Eventually, the bear is driven back into its den, prices begin to strengthen and a new market advance begins the investment cycle once again.

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