THE HAndbook oF TEcHnIcAl AnAlySISIt is important to note that overextensions in volume can signal either a top or
a bottom. Extreme buying and selling activity generates volume and can result in
either a top or bottom. That is the reason why we cannot use the terms overbought
or oversold with respect to volume extremes unless we are able to associate volume
with either a top or bottom formation. Therefore, although we are able to pinpoint
overextensions in volume, it is only possible to identify overbought or oversold lev-
els in volume after a top or bottom has already formed, that is, in retrospect.
Chart sensitivity to Volume action
Figure 6.17 depicts volume action on different timeframes. Notice that the daily
and weekly volume action peaks in 2013, whereas the volume peaks in 2011 on
higher timeframe charts. We therefore see that lower timeframe charts are more
sensitive to volume action. At higher timeframes, the overall trend or behavior of
volume action is more obvious.
fIgure 6.17 Volume Action on the Continuous Multiple Timeframe Chart of Gold.
Courtesy of Stockcharts.com