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Volume patterns
By Jonathan Levinson
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http://www.asianinvestoronline.com/marketsentiment/081203_1.asp

Today saw impressive upside fireworks from the bulls following the requisite post-FOMC uncertainty. The indices, which had traded sideways until 2:15, dipped and then launched nearly vertical rallies. A brief pause and pullback was followed by a second vertical move into the close.

The Dow is now up 5 sessions in a row, and the chart appears very bullish. However, volume is falling off on a daily basis, with today's volume the lowest of the current rally. The reason for today's drop in volume, FOMC uncertainty, is reassuring to bulls because of its non-recurrence for many weeks to come. However, the net effect is the same, namely a lack of strength at current levels.

Traders pay close attention to "gaps" in the price charts, because gaps have a tendency to fill. The reason is that a gap involves a sudden move in which volume is so low that no trades execute as price lurches to its new level. The implication is that should price return to the gap level, there are no buyers or sellers committed to the level in advance, and price has a tendency to fill the gap.

Low volume sessions are a step closer to gaps, in that support is relatively weak on low volume upside days, just as resistance is weak on low volume downside days. Bulls will want to see plenty more buyers committing to current levels in order to reinforce today's gains. However, the tendency of volume to drop on each successive upside day for the past week demonstrates a lack of enthusiasm at higher prices, and implies that the current up-move is corrective. If volume does not accelerate with an upward movement in price, the current gains will remain dubious.