Indicators  |  DEC 1997

Identifying Trends with Volume Analysis by Stephen J. Klinger, CMT

Here’s a new twist on volume analysis, with a volume-based indicator for identifying meaningful trends. Technicians recognize the importance of volume analysis and its application to price movement as requisite to any serious examination of stocks and market averages. While price is the most important dimension of market analysis, how prices move is a function of the intensity of volume that produced it. The true measure of durability behind price movement is most readily available through volume data. Since volume is a proxy for money flow, volume analysis can expose the internal dynamics — the strengths and weaknesses — of price action. Frequently, volume divergences exist beneath the cover of price action and provide the only evidence of an impending reversal. Moreover, since volume is thought to precede price, its usefulness as a leading indicator of price strength or weakness can result in a more accurate assessment of price action. Finally, by converting volume statistics into an effective timing model, technicians would be better able to gauge the validity of a given price movement.

by Stephen J. Klinger, CMT