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Technical Analysis Plain & Simple
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The
Importance of Volume
Let's begin with a common sense theory, volume should follow the trend.
That is, in a bullish phase volume should expand on rallies and contract on
declines. In a bearish phase volume should expand on declines and contract
on rallies.
That's the theory, now here is the common sense.
In
an uptrend an ever-increasing number of buyers are required to thwart pent-up
and natural selling pressures. After all, the higher a stock moves in
price the more likely it is that investors that bought the stock at lower prices
will want to sell. For the rally to continue these shares need to be
absorbed by new buyers. If price advances quickly buyers
may step back creating temporary weakness but these periods should be
characterized by weak volume if the trend is strong.
When a stock is
mired in a bearish trend and the outlook is poor volume should expand on declines
because would-be buyers are overwhelmed by sellers. If the stock sinks quickly some sellers will refuse to
sell, choosing to wait for a small rally in price. This temporary absence
of sellers creates a small vacuum that should lead to a light volume rally. When the stock rallies
sufficiently sellers that failed to exit ahead of the first major decline begin
selling and once again volume should expand.
O.K., if common sense says that volume should follow the trend
what happens when volume does not follow the trend and better yet, what about
the importance of volume in consolidations and breakouts? Of course this
is a not-so-clever segue to our next section on the importance of volume.
support
and resistance in an uptrend 
volume in trends
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