
Market Breadth: Volume Studies
Fortunately, the basic signals conveyed by volume data are easy to read. When a stock is traded, the transaction is recorded and included in the daily volume. When volume levels spike for a stock, index or exchange, the spike points to a price at which a large portion of ownership has changed hands. These prices are significant because they mark a breakeven point for the new shareholders and are likely candidates for support/resistance levels  the larger the spike, the more significant the price.
Over time, if price moves steadily upward with strong volume, this indicates that buyers are accumulating shares and supply is becoming increasingly limited: bulls are winning the fight. Conversely, if price moves steadily downward with strong volume, sellers are unloading shares and outstripping demand: bears are taking this battle.
Cumulative Volume Index
By separating the up volume from the down volume, traders can design internal indicators to support their assertions about the direction of the given stock, index or market.
The first indicator we examine is called the cumulative volume index, or CVI. CVI is calculated by subtracting the down volume (that is, how many shares of losing stocks changed hands) from the up volume (the tally of shares traded in winning stocks) each day and adding that number to the previous day's value for CVI.
The formula looks something like this:
A chart of cumulative volume is usually drawn with a line connecting each day's value. The chart can be analyzed in the same manner as a price chart: by drawing trendlines to indicate direction and support/resistance levels. The actual value of cumulative volume is not important  only the direction and pattern of the chart matter.
CVI = (Up Volume  Down Volume) + Previous Day's CVI
The chart of cumulative volume is most useful when drawn together with a price plot. In this format, look for cumulative volume to reach new highs or lows in tandem with price. This situation indicates that the majority of shares are taking part in the market's direction, so the move can be confirmed. When cumulative volume fails to track the movement in price, a divergence is signaled, indicating that the majority of stocks are not taking part in the move. Look for reversals near these locations on the price chart.
OnBalance Volume
Onbalance volume (OBV) is quite similar to the cumulative volume index, but OBV adds or subtracts each day's volume from the previous day's volume based on whether the price moves up or down.
If today's price is higher than yesterday's, the formula for onbalance volume looks like this:
If today's price is lower than yesterday's, this is the formula:
OBV = Previous Day's Value + Today's Volume
A chart of OBV is interpreted in the same way as a chart of cumulative volume. The chart should look similar to the price chart, and it can also be studied with trendlines and moving averages.
OBV = Previous Day's Value  Today's Volume
Up/Down Volume Spread
The up/down volume spread is similar to cumulative volume, except the difference isn't added together each day. The formula is simply this:
This calculation creates a fast oscillator that revolves around a zero line. Traders can finetune a moving average of volume spread to smooth the signals. As the oscillator crosses the zero line, watch for a change in trend. When the oscillator reaches its extremes, the market could be overbought or oversold. Again, here it is useful to study volume spread in conjunction with a price chart.
Volume Spread = Up Volume  Down Volume
Up/Down Volume Ratio
Just as its name indicates, the up/down volume ratio is up volume divided by down volume:
A value of 3, for example, indicates that three times as many shares advanced as declined on a given day. The chart can be smoothed using a moving average if so desired. Look for a peaking ratio value at new highs to confirm an upward move in stocks. Fractional values indicate market weakness and should be used to confirm new lows on the price plot.
Volume Ratio = Up Volume / Down Volume
Accumulation/Distribution & the Chaiken Oscillator
Designed by Marc Chaiken, the accumulation/distribution indicator is based on the assumption that when a stock or index closes near its high of the day, traders are accumulating shares. In other words, accumulation/distribution weighs volume according to how close to a given day's high or low a stock or index closes. The formula for weighted volume looks like this:
Weighted Volume = Volume [(Close  Low)  (High  Close)] / (High  Low)This value is then used to calculate accumulation/distribution:
Accumulation/Distribution = Weighted Volume + Previous Day's ValueThe same rules for interpreting the other volume indicators apply to the accumulation/distribution line. It is used to confirm price movement in a given stock or index. It should be plotted in its own pane and can be smoothed with a moving average.
A similar indicator called the Chaiken Oscillator further refines the accumulation/distribution line by calculating the spread between its threeday and 10day exponential moving averages. The formula looks like this:
Chaiken Oscillator = Threeday EMA of A/D  10day EMA of A/DBelow is an example of a bar chart of the Dow Jones Industrial Average with its accumulation/distribution line and Chaiken Oscillator below it:
As the Dow Industrials reach a new intermediate high in early September, the accumulation/distribution chart below it confirms the move by also reaching a new intermediate high, but the Chaikin Oscillator points to slowing momentum because it fails to reach the level of its last peak.
The force index combines price and volume into one value, attempting to measure the force behind a move in price. It can be read as an oscillator or cumulatively. Here's the formula:
Force Index = Volume(Today's Price – Yesterday's Price)Crosses above and below the zero line can be read as a change in market trend. Because of the volatility of the force index, using a moving average to smooth and finetune the signals can be helpful.
In Conclusion
Keep in mind that this overview is not to meant to be an exhaustive study, but a useful primer for the novice market technician. It may be difficult to find a free source for a few of these charts but StockCharts.com provides free charting tools, and many of these indicators are included. Most professional trading software packages include all of the above data and charts for those willing to pay a steep price.
Market Breadth: 52Week Highs/Lows


Golden Cross
A crossover involving a security's shortterm moving average ... 
Cup and Handle
A pattern on bar charts resembling a cup with a handle. The cup ... 
Dead Cat Bounce
A temporary recovery from a prolonged decline or bear market, ... 
Confirmation
The use of an additional indicator or indicators to substantiate ... 
Valium Picnic
A market holiday or a slow trading day. 
Fintech
Fintech is a portmanteau of financial technology that describes ...

Why is it important for traders and investors to follow market indicators?
Traders and investors regularly look at several sets of data, including technical analysis tools, fundamentals like company ... Read Full Answer >> 
What does a double top tell a trader about the overall trend?
The double top trend is a charting pattern used in technical analysis to spot a price reversal pattern in a given security ... Read Full Answer >> 
What is Fibonacci retracement, and where do the ratios that are used come from?
Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >> 
What is afterhours trading? Am I able to trade at this time?
Afterhours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular ... Read Full Answer >> 
What are some of the most common technical indicators that back up Doji patterns?
The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >> 
Tame Panic Selling with the Exhausted Selling Model
The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>