Bearish Price / Volume divergence in S&P 500
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     grynearson
Member
Username: grynearson
Post Number: 1
Registered: 11-2005Rating: N/A
Votes: 0
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| | Tuesday, November 22, 2005 - 11:13 am: |  
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I am looking for confirmation of my understanding of a bearish divergence between price and volume in a chart.
Notice the generally decreasing volume from mid October to today and notice the generally increasing price over this same period.
My question: Is this a bearish divergence between price and volume? Comments please.
[Moderators note: please remove advertising logos from charts other than IC]
(Message edited by colin_twiggs on November 22, 2005)
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kruupy
Member
Username: kruupy
Post Number: 14
Registered: 07-2005Rating: N/A
Votes: 0
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| | Tuesday, November 22, 2005 - 12:05 pm: |
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grynearson,
I would interpret this to be a bearish divergence (over bought scenario). I think decreasing volume means that the trend is weakening as the amount of buyers who are willing to go long in the stock decrease (hence why volume is decreasing). If it becomes a situation where the bears now overpower the bulls, its time for the price to drop.
From Kruupy
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david_louisson
Member
Username: david_louisson
Post Number: 148
Registered: 02-2004Rating: N/A
Votes: 0
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| | Tuesday, November 22, 2005 - 06:52 pm: |
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Hi Grynearson
Welcome to the forum.
I haven't seen the idea of divergence between price and volume used before. A more standard practice seems to look for divergences between price and an oscillator, such as stochastic or RSI. Since oscillators measure momentum (i.e. rate of change), a decrease in momentum in an upward trend means that price movement is decelerating, which sometimes points to an imminent reversal.
However, indicators like On-Balance-Volume and Money-Flow-Indicator attempt to measure influx of buying or selling volume into a stock, and supposedly give significance for the reasons that Kruupy gives. Given this rationale, then, a decrease in volume could point to a weakening in the trend.
Just to confuse the issue(!), Richard Arms (inventor of the Arms Index and Equivolume candles) disagrees, and my own research would tend to support his ideas. He believes that a short fat equivolume candle (small price range, large volume) can herald the end of a trend, especially what he calls a "washout" (if memory serves me right) at the end of a downtrend. You can read about his theories by downloading his free book at http://www.armsinsider.com/pdf/ArmsBookwcontents.pdf
If you look at your S&P chart, you can see increased volume around the points where the trends change:
1. At 29-30 Aug, the increase in volume with the second white power candle marks the start of the new uptrend.
2. Similar logic around 21-22 Sept. There are 2 red volume bars, followed by a black one, that again herald the start of the new uptrend.
3. The large white power candle around 19-20 Oct, with increases in volume, again begins a new uptrend. This follows the classic Morning Doji Star pattern a few days earlier.
In marked contrast, volume appears to fall away at the peaks (12 Sep, 1 Oct).
IMHO, Mr Arms' theory should work better with stocks. In the case of the S&P index, I would have thought the weighted averaging of 500 stocks (prices and volumes) would have had a blurring effect, diluting its effectiveness. However, in your brief example, the evidence suggests otherwise.
Good luck!
David
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david_louisson
Member
Username: david_louisson
Post Number: 150
Registered: 02-2004Rating: N/A
Votes: 0
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| | Monday, November 28, 2005 - 07:09 am: |
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Some illustrative examples:
1. UK Tobacco sector:
a) First white line shows increased volume (and long red candle) at the start of a downtrend.
b) White "H" shows increased volume at the end of the same downtrend.
2. UK Retail sector:
a) White H at left: increased volume at the start of the subsequent downtrend.
b) First white line shows volume at the start of the resumption of the downtrend, heralding the sharp fall (gap).
c) No increase in volume here, but included to show how a power candle (inside the "smart channel") marks the reversal.
3. UK beverages sector:
a) High volume, an extreme high and a long upper wick: together, extremely high probability of the impending reversal.
b) Second vertical line: high volume a precursor of the imminent reversal into an uptrend.
David
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