Volume Precedes Price and Confirm Price Patterns
Volume as Confirmation
in Price Patterns
During
our treatment of price patterns, volume was mentioned
several times as an important confirming indicator. One
of the first signs of a head and shoulders top occurred
when prices moved into new highs during the formation of
the head on light volume with heavier activity on the
subsequent decline to the neckline. The double and
triple tops saw lighter volume on each successive peak
followed by heavier downside activity. Continuation
patterns,
like the triangle, should be accompanied by a gradual
drop off in volume. As a rule, the resolution of all
price patterns (the breakout point) should be
accompanied by heavier trading activity if the signal
given by that breakout is real.
In
a downtrend, the volume should be heavier during
down moves and lighter on bounces. As long as that
pattern continues, the selling pressure is greater
than buying pressure and the downtrend should
continue. It's only when that pattern begins to
change that the chartist starts looking for signs of
a bottom.
Volume Precedes Price
By
monitoring the price and volume together, we're actually
using two different tools to measure the same
thing-pressure. By the mere fact that prices are
trending higher, we can see that there is more buying
than selling pressure. It stands to reason then that the
greater volume should take place in the same direction
as the prevailing trend. Technicians believe that
volume
precedes price,
meaning that the loss of
upside pressure in an uptrend or downside pressure in a
downtrend actually shows up in the volume figures before
it is manifested in a reversal of the price trend.
Volume Precedes Price and Confirm Price Patterns
