Stocks & Commodities V. 23:6 (30-37): Spike Up The Volume by Giorgos Siligardos, Ph.D.

INDICATORS

Leading Or Lagging?

Spike Up The Volume

long spike appearing in the volume histogram
usually catches your attention. But how do these
spikes in volume really affect indicators and prices?
A

olume can be considered to be the fuel

of the markets. When the daily trading
volume of a security is extremely high
compared to its average daily values,
that means its attracting a large number of buyers or
sellers. Oftentimes, this huge rush leads traders awry.
In his article A Tale Of Two Indicators, Andrew
Tomlinson gave an interesting example of two volume indicators that diverge, giving opposite signals.
The daily volume spike along with a gapping down
hammer created these signals, and Tomlinson noted
that this divergence was due to the nature of the
formulas of these volume indicators. Here I will
discuss the concept of volume and show that volume
spikes actually do not provide signals that indicate
which way prices will go, but rather provide instantaneous alert signals.

THE TWO-FACED BUS THEORY

nel, moving up and down a hill. The bus represents

the tradable, the height of where the bus is on the hill
represents the price of the security, and the trading
volume represents the fuel of the bus. When the fuel
starts to diminish, the bus may stop advancing and
fall back due to its weight and the laws of gravity. If
the bus driver wants to go down the hill and has
enough fuel, he or she may step on the gas pedal and
the descending acceleration will be much stronger
than the natural acceleration of the gravity. This
simulates the idea that bear markets accompanied by
high volume are extremely severe.
The two-faced bus theory also models consolidation periods with diminishing volume. This is when
the bus runs out of fuel and needs to wait until its fuel
tank is filled again. Only after the fuel tank is filled
can the bus decide where it wants to go.
How are volume spikes represented in this model?
By a sudden filling of the fuel tank. When this
happens, the bus may travel a long way in the
direction it wants. As soon as the fuel tank is suddenly filled, the will of the bus (if it had a will) not
unlike an 18-year-old boy with a brand-new car filled
with gasoline instantaneously becomes unpredictable (which may be the reason why many oscillator developers advise not to use oscillator signals
accompanied with high volume). Let us explore this
situation further using a common-sense approach.

One of the basic guidelines of classic technical analysis is that bullish periods need high volume to continue, whereas bearish periods could continue without the need of high volume. Moreover, when the
volume starts to fall in a bull market, it suggests that SENTIMENT FACTOR AND VOLUME NEUTRALITY
a bearish market is near. An analogy from physics is In his Japanese Candlestick Charting Techniques,
a two-faced bus, like those airport buses with two candlestick expert Steve Nison asks a rhetorical
drivers seats used to transfer passengers and person- question: What is the most significant price level for
a trader/investor on any chart?
Though this question seems to be quite general,
Nisons answer is disarming: The most significant
price level for a trader/investor is the price level at
by Giorgos Siligardos, Ph.D.
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BELLA DOWNS

Stocks & Commodities V. 23:6 (30-37): Spike Up The Volume by Giorgos Siligardos, Ph.D.

Copyright (c) Technical Analysis Inc.

which he/she entered the

market. People become
emotionally attached to the
price at which they bought
or sold. Nison used this argument to explain the sentiFirst Energy Corp.
ment factor that makes sup(Utilities)
B
port/resistance levels important, the implications of their
breakouts, and the change
A
of polarity principle (that is,
Chaikin A/D oscillator
broken support becomes resistance and broken resistance becomes support).
This argument could be
extended further: Since the
On-balance volume
most significant price for
a trader is the price at
which he/she entered a
Volume
position, you could say
that the most significant
price level for a security is
the level considered most FIGURE 1: WHO IS RIGHT? On the daily chart of First Energy Corp. (FE) the volume indicators diverge at bar A, giving ambiguous signals.
significant by the majority of traders that is, the
and firm signals to save you from false breakouts. I will also
price levels at which high trading volume takes place.
It wouldnt be prudent to extract immediate conclusions show, through another example, that volume spike analysis
from a price bar with high volume without knowing at least a can be applied in almost all markets.
little of the movement that follows this bar. The rationale for
this is hidden in the direction neutrality of volume (also noted
VOLUME INDICATORS
by Tomlinson). While a price movement can be classified by
AND INCONSISTENCY
definition as bullish or bearish, volume itself cannot be classiLets look at an example simified as bullish or bearish. Bulls buy the security expecting to
lar to the one that Tomlinson
gain profit. Bears sell the security expecting to gain profit.
used in his article. In Figure 1
Who is right?
you see a daily chart of
The bulls, as much as the bears, may have opposite opinions
FirstEnergy Corp. (FE). There
about the market, but they all try to gain profits and they all
are also three subcharts showagree on the price level that they buy/sell the security. Volume
ing the performance of Chaikin
simply represents the number of all agreements without bias.
accumulation/distribution
A high-volume bar just says, I am significant because there is
much hope or despair in me. But it is the movement that (Chaikin A/D), on-balance volume (OBV), and volume itself.
follows the high-volume bar that will indicate who will finally Three vertical white lines are added for visual clarity. It is clear
be right. If the price drops after the high-volume bar, it means that the gapping down day (bar A) had a terrible effect on both
the bears are right. If the price rises after the high-volume bar, Chaikin A/D and OBV. OBV gave a sell signal and Chaikin A/D
gave a buy signal. What happened next? Chaikin A/D started
it means that the bulls have the upper hand.
But a new problem now arises: How much movement is declining and indicating that it was perhaps not a good idea to
needed after the appearance of the volume spike to pinpoint the buy in the first place. OBV, on the other hand, started advancright direction? There is no certain answer to this question, but ing, showing that it was perhaps not a good idea to sell in the
considering the sentiment factor at support and resistance first place. Then another volume spike appeared (bar B), and
levels, youll find that there will often be a breakout of a short- both indicators screamed Buy! But after that, in spite of
or medium-term support/resistance after the high-volume bar prices and OBV continuing to advance, Chaikin A/D started
declining, suggesting a bearish situation was near.
that can be used to indicate the direction of prices.
From this you could conclude that OBV was more consisVolume spikes provide leading alert signals and lagging
direction signals. I will show you three examples where you tent, but what if someone had followed its first sell signal after
will see the usefulness, or lack thereof, of volume indicators the downward breakout at bar A? The downward OBV moveand how volume-spike analysis could provide more confident ment at bar A broke a historical support level of OBV, which
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METASTOCK

Stocks & Commodities V. 23:6 (30-37): Spike Up The Volume by Giorgos Siligardos, Ph.D.

Stocks & Commodities V. 23:6 (30-37): Spike Up The Volume by Giorgos Siligardos, Ph.D.

made the sell signal even

stronger from the perspective of classic technical
analysis. This is an example
of how relying on the behavior of volume indicators at volume spikes as direction signals creates nothing more than confusion.
But if you consider their
behavior as an alert, youll
see that signals are more
consistent. In this example,
both indicators were correct. They were both (each
in its own way) saying
the same thing: Something is going on here!
But most people interpret
an instantaneous upward
movement of an indicator
as a buy and a downward
movement as a sell.

L1
A

L3 B

?
L4

L2
Great Plains Energy Inc.

Chaikin A/D

OBV

Volume

FIGURE 2: DAILY CHART OF GREAT PLAINS ENERGY INC. Chaikin accumulation/distribution and on-balance volume give ambiguous
signals at high volume bars A, B, and C.

SPIKES,

SENTIMENT,
AND RATIONAL THINKING
Lets look at this example from the perspective of sentiment. A gapping-down white candle occurred at point A
with very high volume. Because of the appearance of the
white candle, basic technical analysis suggests this is bullish for the short term and bearish for the long term (because
of the downward gap).
After the formation of the gap, it is reasonable to expect
prices to test the upper level of the gap before declining to new
lows. But volume spikes make things complicated and you need
to see how things will proceed before you act. At this stage
(based only on the information shown), a closing price slightly
below the low of the white candle (bar A) could be considered
a possible sell signal. But as you can see from the chart, price
advanced and stopped above the upper boundary of the gap after
A. Then you were confronted with another unexpected price
movement. Another big white candle (bar B) appeared, accompanied by a volume spike, similar to the previous one.
Here is where things become interesting. Since the gap is
now filled, it is my guess that you are slightly more bullish than
bearish but still not sure because of the high-volume bar B.
However, you could consider two levels to give you direction
signals. You could consider the low (or slightly below) of the
white candle (bar B) as a support level which, when broken,
will give a sell signal with a first target of 25.82 (the low of bar
A). You could also consider the high (or slightly above) of the
white candle (bar B) as a resistance level which, when broken
up, will give a buy signal. These two threshold levels are
illustrated as red horizontal lines in Figure 1. The upper
threshold was crossed approximately 10 bars later and as can
be seen, it was a solid signal (blue arrow). The small pullbacks

after that (small downward red arrows) did nothing more but
make the buy signal even more confident.
Now, take a look at the two spikes and their implications.
The first spike implied a reversal, and the second spike implied
a continuation. But you cant really be sure who bought or sold
at bar B. All you can do is suspect that those who sold at bar B
were of two kinds: Those who had not sold before the first gap
down and now have an opportunity to break even, or those who
bought at bar A and wanted to lock in their profits. In any case,
the buyers proved to be right.

A SECOND EXAMPLE
In Figure 2 you see a daily chart of
Great Plains Energy (GXP) along
with Chaikin A/D, OBV, and volume. Here again I have added vertical black lines for visual clarity.
You can clearly see three volume
spikes at bars A, B, and C. If you
consider the behavior of the OBV at these points as a signal, you
would have been thrown off course. The same thing would
have happened if you had also considered the behavior of the
Chaikin A/D as a signal at bars B and C. At least in this
example, both volume indicator signals suggest the same
direction at B and C.
Again, the behavior of the indicators at the spikes is not
incorrect if they are considered to be alerts for a significant
event (considering the general volume behavior outside those
spikes). Nor are volume indicators useless all the time. It is the
spikes that distort the regular movement of volume indicators

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Stocks & Commodities V. 23:6 (30-37): Spike Up The Volume by Giorgos Siligardos, Ph.D.

and provide ambiguous direction signals. For exAvery Dennison

200-period simple moving average
ample, from bar A to bar B,
OBV supported the upward
price move and indicated
the correct direction. But
how can you get reasonable and more solid signals
using the information from
the spikes?
Chaikin money flow
In this case, at bar A you
could use level L1 as a
threshold for a buy signal
Chaikin A/D
and level L2 as a threshold
for a sell signal that is, a
OBV
closing price above L1 or
one that is below L2 is the
trigger. You dont want to
Volume
set a threshold level that is
too close to bar A because it
could be risky. For example,
the flagrant gap above bar
A provides tremendous re- FIGURE 3: VOLUME SPIKES AND SINGLE BAR BREAKOUTS. The volume spike along with the big black candlestick on April 17, 2003,
which broke the significant support level (blue horizontal line), made the three volume indicators point downward. The price is also below
sistance.
the 200 period simple moving average. Is this a sell signal?
At point B, where another
volume spike appeared,
price failed to break above
the L1 level but broke down
Avery Dennison
200-period simple moving average
below the short-term resistance L3, pushing all those
who bought at B into the
wall. This move gave the
first indication that a further decline could lay ahead
(small blue down arrow).
Chaikin money flow
But this is not a strong
signal note the question
mark above the arrow
Chaikin A/D
due to a couple of reasons.
For starters, L3 is a very
short-term support and just
OBV
below L3 is the bar A level:
L4. Volume-spike bars
(such as A) provide great
Volume
support/resistance (remember the sentiment factor discussed previously).
When prices broke below FIGURE 4: DAILY CHART OF AVERY DENNISON (AVY). The threshold level defined by the low of the high-volume black candlestick on
L4 (second small blue April 17, 2003 (red horizontal line), didnt break and it acted as a vaulting horse that moved the price higher.
downward arrow), it was a
more solid sell signal than the first one. Because prices de- that there was another volume spike and prices broke below L2.
clined for a while after bar A on low volume but remained This was the final strike to all bulls that bought at all three spikes.
above L2, it suggests that those who bought at A may be willing
to take the risk to sustain their position for as long as L2 is not SPIKES AND BREAKOUT CONFIRMATION
broken. So using L2 as a threshold level would be less risky. In Figure 3, you see a daily chart of Avery Dennison (AVY).
The strongest sell signal came after bar C. At C, you can see Below the price chart are three volume indicators as well as
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Stocks & Commodities V. 23:6 (30-37): Spike Up The Volume by Giorgos Siligardos, Ph.D.

volume. A 200-period
simple moving average is
A
also overlaid on the price
B
chart. On April 17, 2003,
GEK
price declined sharply,
forming a large black candle
accompanied by a very high
volume spike. All volume
indicators (Chaikin money
flow, Chaikin A/D, and
OBV) turned downward and
Chaikin A/D
took extremely low negative values. The black
candle also broke out of a
significant support level
(blue horizontal line).
OBV
All factors (simple moving average, volume indiVolume
cators, breakdown of support level) point to an extremely bearish situation,
except the volume spike,
which just indicates that FIGURE 5: DAILY CHART OF GEK. Price advanced quickly and stalled at bar A near a previous resistance level (blue horizontal line).
The most significant signal came after prices broke below the short-term support line (red horizontal line).
something is going on.
Though the closing price of
April 17, 2003, is well below the support level of 52 (blue OBV and Chaikin A/D indicated a possible decline ahead, and
horizontal line), this support level is broken by only one bar. at bar B, Chaikin A/D and OBV diverged. From these bars, you
Does this mean the break is not meaningful? This question can cannot predict if the trend is going to reverse. The clear sell
only be answered after the subsequent bars have formed.
signal (blue downward arrow) came only after the short-term
The black candle (including shadows) that appeared on support line (red horizontal line) was broken.
April 17, 2003, had a relatively large range so the high and low
could be used as the threshold levels. Looking at the informa- CONCLUSION
tion on the chart, only the threshold level (short red horizontal Volume reflects the amount of participation at a price level and is
line) defined by the low (or slightly below) of the black candle something that can be thought of as direction-neutral. When you
can be considered significant.
see spikes in volume, they can create ambiguous signals and
An ideal sell signal would be generated if this threshold were distort price and volume-based indicators. In spite of that, volume
broken after a pullback to the previous broken support line. So spikes are useful since they pinpoint important price levels. So
what really happened? If you look at Figure 4, you can see that when interpreted properly, they can provide extra information and
the price level did not break below this threshold. This means the explain future price behavior. If you consider signals from volume
breakout was a false one. Further, prices used this support level spikes as alerts, they can be thought of as leading indicators. If, on
as a vaulting horse for moving upward (see blue upward arrow). the other hand, you consider volume spikes as directional signals,
they can be thought of as lagging. To clear the misty landscape,
GLOBAL APPLICATION
you must use price movement that follows the spike in conjuncIn Figure 5 you see a chart of GEK Group (GEK) and subcharts tion with the past price and volume performance.
of Chaikin A/D, OBV, and volume. GEK is a holding company
trading in the Athens Stock Exchange of Greece. I chose this Giorgos Siligardos teaches in the department of applied
example to show that the general interpretation of volume mathematics at the University of Crete. He also teaches at the
spikes discussed in this article can be globally applied. Two department of finance and insurance in the Technological
very tall volume spikes are clearly identified in the chart (bars Institute of Crete.
A and B). The spikes appeared when price got close to a
previous significant resistance (blue horizontal line).
RELATED READING
At first glance, this situation appears to be more bearish than Nison, Steve [1991]. Japanese Candlestick Charting Techbullish. Rational thinking suggests that traders are probably
niques, New York Institute of Finance.
unloading shares, but as we saw in the previous examples, this Tomlinson, Andrew [2004]. A Tale Of Two Indicators,
is only a suggestion and more information is needed. At bar A,
Technical Analysis of STOCKS & COMMODITIES, V 22:
S&C
October.
See Traders Glossary for definition
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