What One of the Most Important Technical Indicators is Saying About the Market


I’ve been highlighting the trend of distribution volume in the SPY (S&P 500 ETF) since April, and that trend continues presently.

Let’s take a quick update on what volume suggests about the health of the stock market:

We continue to see phases of Distribution Volume as price rallies and retraces from May to present.

To recap, one of the basic principles of Technical Analysis is the relationship between Price and Volume – some traders make their decisions using only price and volume (though most of us prefer additional indicators for extra information).

In general, when price rises in an uptrend and volume also shows a trend of rising, this is a form of confirmation and thus suggests that the trend is healthy and should continue.

However, when price is rising in an uptrend and volume shows a pattern of declining, this is  a non-confirmation or divergence which suggests that the uptrend is weaker than price suggests and that a reversal – or at least a deep retracement – is favored.

The same logic is true in a downtrend – falling price and rising volume is a confirmation that suggests the downtrend should continue.

Falling prices and falling volume – a non-confirmation/divergence – suggests weakness of the downtrend and that it may reverse/fail in the near future.

Taken together, we can use volume to assess the health of trends in motion.

What are we continuing to see presently?

Volume continues to increase as price swings lower, and volume tends to decline as price swings higher.

This suggests a broader pattern of Distribution and that caution is warranted (lower prices tend to be favored when price and volume are showing Distribution Patterns).

This has been the case recently, as I’ve highlighted in two prior similar updates:

May 11: Update on SPY and DIA Distribution Volume

April 11: April trend towards Distribution Volume in the US Equity Markets

Take a moment to review those posts for additional information (and to see what the picture looked like in real-time).

Unless we see a sudden reversal of these persistent patterns (we have to monitor real-time developments as they occur), caution is still warranted in this environment of distribution volume.