Volume Matters

“The bottom is preceded by a period in which the market declines on low volumes and rises on high volumes. The end of a bear market is characterised by a final slump of prices on low trading volumes. Confirmation that the bear trend is over will be rising volumes at the new higher levels after the first rebound in equity prices.” (Napier Russell, Anatomy of the Bear: Lessons from Wall Street’s four great bottoms)

Volume analysis is an important consideration in determining whether the index is at the beginning of a rally or the end of a bear.

Historical trading graph and volume of Malaysia’s FBMKLCI is shown below:

FBMKLCI 23072016.jpeg

The volume of rises and declines of FBMKLCI is discussed as follows:

Rises Volume

RisingVol_FBMKLCI.png

2009 – end 2013: increasing rise volumes coincides with a bull run in the FBMKLCI

2014 – 2015: lower rise volumes coincides with a downward reversal in FBMKLCI

2015-2016: increasing rise volumes potentially mean the end of the bear market? To confirm this, we need to see a much higher volume to be followed by upward price movement

Declines Volume

DeclineVol_FBMKLCI.png

It works quite opposite to the Rise Volume. Nevertheless, we are currently seeing a lower decline volumes, which may potentially mean the end of the bear market with FBMKLCI.

Final Words

Trading volume is only one part of the entire equation. More importantly, the end of bear market should always be accompanied by positive catalysts / strong macroeconomic indicators.

 

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Author: Ken Utau

Data Scientist, Markets Analyst and Food Lover

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