Speaking Volumes

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The Moving Averages and Advance/Decline Lines show price movement, which is only half of the story.  It is one thing to see which way prices are moving, but without knowing the volume of the movement (number of shares traded), the technical analyst does not have the full picture.  The price of a stock gives only the current value, but without the amount of stock traded, it is of little worth.  A hundred shares traded at $20 is one thing; ten thousand shares traded at that price is quite a different story.  The number of shares traded gives a much clearer picture of the supply (amount available from sellers) and the demand (amount wanted by buyers) for the stock.

We looked at Humphrey B. Neill's book, The Art of Contrary Thinking in an earlier blog.  Another of his books,Tape Reading & Market Tactics, first published in 1931, is still in print.  Neill had quite a bit to say about volume of trading as an indicator of supply and demand.  He explained the role of volume in technical analysis as follows:

For the sake of simplifying our problem, I shall here roughly define the three main types of volume-activity:

First:  Increasing volume during an advance, with the intervening pauses or setbacks occurring on light volume.  This is indicative of the underlying demand's being greater than the supply, and favors a resumption of the advance.

Second:  Increased volume at the top of a rally, or of an advance, lasting for some time, with no appreciable gain in prices - an active churning of stock transactions without progress.  This is indicative of a turning-point.

Third:  A "tired," or struggling , advance, when stocks creep upward on light volume or "die" at the top.  This indicates a lack of demand (few buying orders); and, whereas, selling-orders likewise are light, this action frequently marks a "rounding-over" turn, which may be followed by increased volume on the down side (when the sellers see that they cannot hope for much higher prices at the time).  These struggling trends are subject to sudden reversals, particularly when they have endured for several days.

These types of action are present, but reversed in sequence, in declining markets.*
Author's emphasis in bold.

Volume shows where the money is flowing.  Norman G. Fosback, in his work, Stock Market Logic, A Sophisticated Approach to Profits on Wall Street, discussed several volume indicators which he felt were important, including one he called On Balance Volume ("OBV").  He had this to say about the topic:

The common theme of OBV and each of these money flow methods is that the more volume used to produce any given price change, the greater, and more significant, is the reading.**
Author's emphasis in bold.

Mr. Fosback explained that OBV is based on the theory that volume trends lead to price trends.  In other words, the volume of trading in a stock over a period of time presages the price of the stock, which will follow the path of the volume, either up or down.

* Excerpt from Tape Reading & Market Tactics, Humphrey B. Neill, republished by BN Publishing, pages 43-44

** Excerpt from Stock Market Logic, A Sophisticated Approach to Profits on Wall Street, Norman G. Fosback, copyright 1976, 1993, The Institute for Econometric Research, page 222

Comments are always welcome.