Conventional trading “wisdom” states that a rally that occurs on falling volume is bearish. Conventional “wisdom” states that sustainable rallies should occur on rising volume.
This simply isn’t true. As we said in Don’t use volume for trading,
Rising/falling volume isn’t a bullish sign or a bearish sign. It just is. Volume is mostly irrelevant. It doesn’t give you much of an edge in the markets.
The S&P 500 is rallying on falling volume right now.
Here are the historical 10%+ corrections since 1998. (The S&P has fallen 11.8% so far a of April 2018). Notice how there is no consistent correlation between the market’s volume and its post-correction rallies.
*We don’t have volume data before 1998.
- Some post-correction rallies occured on falling falling
- Some post-correction rallies occurred on flat volume.
- Some post-correction rallies occurred on rising volume.
This means that a post-correction rally with falling volume is NOT a bearish sign. It is not an “ominous sign” for the stock market. It’s an irrelevant sign.
Here are the bottom dates for those corrections:
- February 11, 2016
- June 4, 2012
- October 4, 2011
- July 1, 2010
- August 16, 2007
- February 28, 2000
- October 18, 1999
- October 8, 1998
Let’s look at the S&P 500’s volume during each of these times.
February 11, 2016
June 4, 2012
October 4, 2011
The S&P 500 ended its 21.5% “significant correction” on October 4, 2011. The subsequent post-correction rally occurred on falling volume. The stock market rallied in a very choppy manner with big waves.
July 1, 2010
August 16, 2007
February 28, 2000
October 18, 1999
October 8, 1998
The stock market’s recent rally on falling volume is not a bearish sign for the stock market. It is an irrelevant sign for the stock market. It’s neither bullish nor bearish.
Moreover, volume is falling because we are in the final weeks of summer, when many market participants are on vacation. Volume always falls during the summer.
Click here for more market studies.