Volume Is Only Helpful From A Relative Perspective
If trading volume for the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) was exactly the same every day, it would not be helpful. Volume analysis is a relative game. If SPY gains 1% on a Monday on 50 million shares and drops 2% on Tuesday on 100 million shares, it is easy to see some differentiation between the conviction to own SPY vs. the conviction to sell SPY. What can we learn from SPY volume in recent weeks?
SPY Gains This Week On Very Low Volume
SPY has gained ground on Monday and Tuesday of this week, but the gains occurred on trading volume that was lower than New Year's Eve. Compare trading volume during the January 2016 sell-off (blue box below) to this week (orange box).
But Volume Has Been Low Recently
Yes, volume analysis is a relative game. Stocks dropped on June 10, 13, 14 and 15; notice volume on those days relative to this week.
Brexit Is The Issue This Week, Right?
Yes, it is relevant. However, stocks posted gains on May 24, 25, and 27; compare volume on those green days to recent red days for SPY.
What Can We Learn From All This?
Is trading volume the best method available to manage risk? No, in fact, volume analysis is not even close to the top of the helpful list, but it can add some value under certain circumstances.
The main takeaway is we can be more confident about rallies that occur on strong volume and we should be more skeptical of the sustainability of rallies that occur on low volume. Therefore, in the present day, volume is saying view recent moves in SPY with some healthy risk-management skepticism and understand that higher volume reversals would increase our concerns. Conversely, if SPY breaks to the upside on improving and heavy volume, our confidence in the sustainability of the breakout would increase.
Volume, viewed in isolation, is never a reason to buy or sell; it is one of many factors in the weight of the evidence equation.
Brexit And Fed Could Push Stocks Higher
As noted on June 21, the market appears to be anticipating a "stay in the EU" (NYSEARCA:VGK) outcome this week. If voters cast their votes in line with market expectations, stocks could get a double boost if we add in the Fed radical shift that was communicated to the markets between June 15 and 17.
Disclosure: I am/we are long SPY.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.