Volume and Open Interest
fIgure 6.2 Bullish Volume Expanding in the Direction of the Preexisting Trend on the
Continuous Daily Chart of Gold.
Courtesy of Stockcharts.comdowntrend. This shows that declining volume does not necessarily imply bearishness
and similarly, rising volume does not imply bullishness. This is a simple mistake that
many novices make when trying to interpret volume action. The bullish or bearish
sentiment associated with volume action depends on the direction of the price.
In Figure 6.2, we observe volume expanding in the direction of the primary
bull trend in gold, in which volume declines during a retracement, as expected.
In Figure 6.3, we observe volume action that is not confirming the preexisting
trends. Here we see that both rising and declining volume are regarded as bearish
volume if both volume and price move in opposite directions to each other in a
preexisting uptrend. This is an indication of a potentially weak or bearish uptrend.
Conversely, both rising and declining volume are regarded as bullish volume if
both volume and price rise and decline together in a preexisting downtrend. This
is an indication of a potentially bullish downtrend.Volume Confirmation and Divergence
This leads us naturally to the concept of volume confirmation and divergence.
Simply put:■ (^) Volume divergence occurs whenever volume declines, irrespective of the direction
of price.
■ (^) Volume convergence or confirmation occurs whenever volume rises, irrespec-
tive of the direction of price.
Volume divergence implies that market participants are not interested in see-
ing prices rise or decline further. As prices rise and volume subsides, traders and
investors indicate that they are less interested in participating in the upside move.