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Using volume to validate price
In my earlier blog posts in the technical analysis series, I focused more on prices which obviously dominate what we see on price charts. Chart patterns like the head and shoulders, Fibonacci levels and trend lines are all very important in helping us forecast where prices are likely to go. Another important indicator that I like to use is not found in the main body of the charts but rather at the bottom of price charts. This indicator is volume and it is very useful in confirming price trends. If prices go up but volume goes down, this shows that not many people are buying into the rally and hence the rally is not likely to last. An example can be seen on a price chart of USO, an Exchange Traded Fund (ETF) that tracks the price of crude oil, shown below. The sharp price rise in March and May 09 was accompanied by low volume and the rally stopped soon after.
However, if there is a price breakout that is accompanied by strong volume, there is a higher likelihood that this rally will have further to go. In my Oct 29 post, I drew attention to the price spike in UUP, an ETF that tracks the US dollar, which was accompanied by exceptionally high volume. At that time, everyone was very bearish on the US dollar. UUP price pulled back to a lower price on lower volume and then started another rally on high volume in late Nov 09. This strong volume when prices go up gives me confidence that this rally will last and we should see the US dollar get stronger in the coming months. The price chart also showed that $22 was a strong support area as prices bottomed at that level last year.
Well, it is almost Christmas as there is much to do so I don’t have much time to write blog posts. I thought I would quickly publish this one to give a heads up to readers who may be interested in the direction of the US dollar in 2010.
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