This week I thought we could take a broad view of volume and what to look for.
When price is trending higher, the most basic form you want to see is expanding volume on upbars, or as price rises, and contracting volume on down bars, or whenever price dips lower.
This is both true for the individual bars on a chart, and for the broader up and down waves of buying and selling.
What this is showing is that price is being pushed higher on the increasing volume, and the sellers are insignificant when price moves lower. To take this another step further, as volume expand on the upbars, you preferably want to see wider spreads, and when volume contracts on the downbars, you want to see spreads reduce. Same for the waves of buying and selling - you want to see the upwaves (buying waves) show a greater length and duration, when compared to down waves (selling waves), which should be more shallow and brief.
If for instance, you see volumes increase to above average, and price does not push higher and generally moves sideways, particularly if there is a decent uptrend in the background, you should suspect that selling pressure has increased. This does not necessarily mean a full blown distribution will begin, but it is an alert that supply has increased, and price may need to pull back or consolidate in response.
And the inverse, or mirror image is true in a downtrend - where there is usually expanding volume seen on downbars (and down waves), and contracting volumes on upbars (and upwaves).
Slowly work your way through the chart below, as you will need to follow the price action and volume bar by bar to understand it.
Firstly there is a little false start, that was possibly only a half hearted attempt to breakout, then the increased supply that was drawn out was absorbed as price swept lower until the volume (showing the selling pressure) was low.
Price moved up to the highs of the sideways range, and then punched higher over two bars as price broke out on high volume.
There is almost always high volume like this as price pushes out of a range, because it takes quite an effort to initially push price into fresh higher ground & whenever there is a substantial rise in price, there is always increased supply drawn out (made up of profit takers from below, stale holders 'getting out' of a loss situation, and fresh short positions that are opened).
This increased supply must be absorbed (bought) for price to push higher.
Following that there is a brief period of consolidation.
Note the first downbar after the breakout, volume contracts, and the spread remains well within the range of the previous upbar, this is a potential sign that the sellers are not overwhelming (if the down volume was really high, and price had closed clearly below the low of the previous bar - it is a sign the sellers are strong, so it maybe a PnD, or the amount of supply waiting above maybe overwhelming, and might force price back into the sideways range (creating a false breakout), and will need to continue the sideways accumulation/absorption process in an effort to remove that supply above.
Following that little consolidation, price pushes higher a second time, with the expected sharp increase in volumes.
Then another little sideways consolidation period, where the down volumes are initially highish, but reduces as the consolidation goes on.
Price then pushes out of the consolidation with an increase in volumes, and then price moves into a nice example of bullish absorption (go back for a refresher above if required).
Price then pushes higher again on higher, and expanding volume, and then the gains are consolidated.
This is almost a textbook example of a breakout, showing expanding volume on upbars, and contracting volumes on downbars.
Price action and volume may not always be this clear.
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The chart below show a similar example, however this time it is looking at the waves of buying and selling, instead of the individual bars.
