Volume is an important aspect of technical analysis as the number of shares traded will tell a story about the market sentiment.
By knowing both sides of the buyer’s and seller’s volume, you can easily gauge if the stock is facing buying pressure or selling pressure.
Interpretations of Volume
Basically, volume analysis is useful when applied to price movements (to confirm the trend of the stock), as well as the chart patterns.
Strong or weak trend
To confirm the trend of the stock, volume has two major premises:
Whenever the price of a stock rises or falls with relatively high volume, it indicates a strong uptrend or downtrend; and
Whenever the price of a stock rises or falls with relatively low volume, it indicates a weak uptrend or downtrend.
Based on the chart below, after the stock broke above the resistance level at about RM2.27 (which then became the support level) and touched at RM2.61, it started to lose ground.
At the same time, the volume declined as well which indicated a weak downtrend.
Confirm the patterns
The volume indicator is also used to confirm the chart patterns, such as head and shoulders, triangles, flags and other patterns.
As for this case study shown in the chart, the pattern of the recent share price performance is a triangle.
Currently, the share price is trading at the support level; and based on the RSI indicator, it is reading at 30%.
When the RSI crosses above the 70% level, the stock is considered overbought, and when the RSI is crosses below the 30% level, the stock is considered oversold.
To interpret, the RSI indicator reading below the 30% level is a buy signal, especially when the indicator is turning up from bottom.
The signs – recent downtrend of the stock price performance coupled with declining volume, oversold signal and trading at support level – may represent a buying opportunity.
However, if the stock price cannot hold at the support level of RM2.27 and break below with increasing volume, this may not be a good sign.
If that is the case, the stock may enter a bearish period. Look out for a turning point that may represent a trading opportunity.
As always, it is best to confirm buy/sell signals with other indicators.