One of the main tools a technical analyst uses is volume. Coupled with price movements, volume is the key to reading into future direction of the security you are analyzing.
The way I look at volume is that it is the driving force of the market. When we see low volume, the significance of the price movements is greatly reduced as the professionals have no real interest in the stock. On the other side of things, ultra-high volume indicates a high level of activity from the professional market drivers. The key to the whole equation is being able to decode if the huge volume is made up of buying or selling.
To test this, let’s look at an old chart of huge volume on Goldman Sachs:
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So, now the question is are you buying or selling GS with that chart? Logic would say sell and run from this nasty chart. The proper move is to wait for the next day for confirmation of weakness:
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Hoping that you weren’t stopped out yesterday, GS recovered very nicely making up over 5% the next day. What does that mean? There is no way that the previous day’s ultra-high volume was purely selling if the stock was able to push higher the next day. Therefore, this is a very bullish action showing that the professionals are bullish on the stock and you should expect higher prices.
Here’s the current chart of GS:
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As you can see, GS continued to climb after the false sell-off. The bottom line here is when you see huge volume, wait and see what happens the next day. If the stock is up on enormous volume, but then falls the next day, it is weakness and unless buying comes into the market, the stock will fail to move higher.
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