Trend Analysis
exhaustion, with a reversal expected. Similarly, a reversal is expected for any
price penetration below a downtrending line. It should also be noted that any
short term penetrations below an uptrending line or above a downtrending
line are usually regarded as false breakouts rather than being specifically cat-
egorized as overextended. See Figure 5.29.- Volume Spread Action: The relationship between volume and price is most
significant when price and volume exhibit extreme behavior. There are basi-
cally 4 scenarios where this relationship is of interest:
■ (^) Very large bar range accompanied by very large volume: This is normally
regarded as trend promoting, being a potentially bullish sign when the bar
closes at or very near the high. In an uptrend, this would suggest a strong
continuation of any existing uptrend, and reversal of any exiting downtrend.
If the close was near or at the bottom of the range, then it would be regarded
as potentially very bearish, suggesting a potentially strong continuation of
any existing downtrend and reversal of any existing uptrend.
■ (^) Very large bar range accompanied by very low volume: This is normally re-
garded as trend inhibiting, although not necessarily as an indication of a po-
tential reversal. It implies a lack of commitment underlying the price move.
■ (^) Very small bar range accompanied by very large volume: This is also nor-
mally regarded as trend inhibiting and is regarded as a significantly stronger
indication of a potential reversal. It shows that even with such a large com-
mitment in capital, there was no further extension in price, implying a strong
opposition to the existing trend. This is popularly referred to as a “squat bar.”
■ (^) Very small bar range accompanied by very low volume: This is normally regard-
ed as trend inhibiting although not necessarily leading to a potential reversal.
- Volume and Oscillator Divergence: The appearance of standard or reverse di-
vergence between price and volume, or with any oscillators, may give an early
indication of potential reversals or continuations in the market. (Please refer
to Chapter 9 for more on divergence analysis.)
figure 5.29 Price Exhaustion.