Again, the Dow Theory is actually a set of several theories that summarily aim to
forecast major market trends. We'll be focusing on one just one aspect today -
volume. The premise of volume is painfully simple, and shouldn't be news to any of
us: volume should expand in the direction of the trend. If you don't get increasing
volume in the direction of the trend (whether it be up or down), then the trend is
less likely to continue. Or to put it another way, if volume is relatively low and
dropping, there is diminished interest in seeing that trend continue. The bottom line
is, it's buyers and sellers that push a market higher or lower, and volume will tell
you whether or not there are enough buyers or sellers out there.
As we said, this is a simple idea, but too often overlooked. Today it won't be. In
the weekly chart below we'll again look at the Dow Industrials, this time with volume
data. What we're looking for is increasing volume in the direction of the trend. We
are seeing an initial burst of volume that coincides with the first week of the
bullish reversal. In fact it's quite bullish that we're seeing heavier volume in the
recovery weeks than we are in the sell-off weeks. However, after that first week,
volume wanes, and shortly after that, the rally wanes also.
Dow Industrials (Weekly) with Volume
How much volume do we need to see to say that this upturn has legs? There's no
perfect answer, but there are a couple of good signs.
1. First, we'd like to see a gaining week on heavier volume than the initial recovery
week following a sell-off. October's monster rally got a jump-start with a spike in
volume (July's recovery rally was even on heavier volume than that). As a starting
point, let's just look for March's weekly high. We'll look at those other weeks when
we cross that first hurdle.
2. Second, we would settle for a general increase in overall volume. This can be more
subjective, but you'd at least want to see a couple of consecutive weeks of higher
volume, and ideally more than that.
The other important idea is that you get a sustained volume increase. That's what
ultimately went wrong in July and October. After that first jump on a burst of
volume, the trading activity slowed and stocks eventually fell again.
Note that we have two more days worth of data to add to this week, so the jury's
still out about the current uptrend. Since early March when the run-up started,
volume has been generally dropping. However, since this is a longer-term idea, the
volume trend isn't always evident right away. Keep an eye on volume for the rest of
this week and next week. If we continue to make higher highs on lower volume, use
caution. If we instead go lower on increasing volume, you know what that means as
well.
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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