But there is an important nature of volume that I don’t think he took into consideration. Everything else being equal, volume tends to be cyclical and follow a pattern. For example, it tapers off during holidays like Christmas and New Years (yellow squares on the chart). Volume is light from June to August - what is referred to usually as the summer doldrums. And it spikes for panic lows (you can see a few examples above).
But is there anything we can look to from recent low volume?
I started from using June 8th 2009 as a base; on Monday the amount of volume traded was 32% below a 60-day moving average of volume. In the prior week volume traded between 6 and 21% below the 60-day moving average of volume. So looking back to 1950 how many days in June did volume trade below the 60-day MA of volume by 30% or more?
The majority of these cases occurred in the late 50s and early 60s with large number of light volume days populating June. But there was a dramatic shift from 1979 to 2009 with only the odd day here and there and no light June trading day in the nineties.
How did the S&P perform during these periods?
I tried to group the performance into general associations. The first group of five enjoyed periods of continued strength into the end of July or beginning of August before entering a downward phase lasting into mid-September and October. Only in 1988 did the rollover occur early and bottom at the end of August.
The next group of five had sustained periods of weakness for June or mid-July, but this was followed by significant rallies where the June/July low reflected the absolute low for the following 6 months.
And then there was the odd cases which didn't really fit any pattern (although 1976 could probably muscle into the 'June low and rally' group)
So is there anything we can take from this?
Not really. There is nothing to suggest very light volume as part of a seasonal light trading period reflects underlying weakness. In the case of light June trading there is perhaps a greater case to be made in favour of a consolidation lasting to the end of June/mid-July before markets kick into a significant push higher - but it's a weak case.
However, with the exception of 2001, there was no strong evidence to a significant market meltdown and certainly no move which made a substantial undercut of June prices.
So, seller beware.
In my next article I will look at how the relative position of the S&P to its moving averages combined with light volume influence future price action.
Dr. Declan Fallon, Senior Market Technician, Zignals.com the free stock alerts, market alerts, and stock charts website