The Volume Accumulation indicator combines volume and a price-weighting that attempts to show the strength of conviction behind a trend; the Volume Accumulation indicator might prove useful in uncovering divergences.
The formula for the Volume Accumulation formula is shown below:
- Volume x [Close – (High + Low)/2]
The formula only gives positive volume to the day if the close is higher than the midpoint of the high and low. If the close is towards the lower half of the range of the price action, then volume is negative for the day.
A chart compares the Volume Accumulation indicator with the On Balance Volume indicator that adds positive volume if the close is higher than the previous close, even if the close is only a penny higher, is given next of the stock Citigroup (C):
As can be seen in the chart above, Volume Accumulation was giving a more realistic representation of what the stock of Citigroup was doing – going downward. The logic behind the Volume Accumulation technical analysis indicator is follows:
- An up day on high volume is considered bullish, because volume is being transacted at higher prices; for example, there is an imbalance of supply and demand, demand is more than supply, therefore price increases. The fact that there is much volume shows that the size of the supply and demand imbalance is large.
- A down day on high volume is considered bearish, because volume is being transacted at lower prices. With an imbalance of supply and demand, there being more supply than demand, then prices will go down. Since there is high volume, this is a bearish signal because there were many more stock traders and traders trying to get out of their position and willing to do that by asking for a lesser price.
A potential use of the Volume Accumulation indicator is to confirm price movements and show divergences between the indicator and prices, signaling a possible reversal in trend. This is discussed on the next page.
Volume Accumulation Divergences
A trader might view any increase or decrease in price with little volume with skepticism. The Volume Accumulation indicator attempts to expose instances where price is making new highs or lows, but the indicator is failing to confirm those price moves.
Also, the Volume Accumulation technical indicator attempts to confirm price movements.
The chart below of the Russell 2000 e-mini futures contract shows examples of these divergences, both bearish and bullish:
High #1 to High #2
The E-mini Russell 2000 future made a lower high; this move lower was confirmed by the Volume Accumulation indicator which made a lower high as well.
Low #1 to Low #2
The emini futures contract made a lower low; however, the Volume Accumulation indicator did not confirm this move. Instead, the indicator made a higher low, a bullish divergence suggesting that the bottom may have arrived in the price of the futures contract.
This bullish divergence may have acted as a strong indication for traders to lessen the size of their short positions or even buy to cover all their short positions.
Low #3 to Low #4
The Volume Accumulation indicator confirmed the price increase in the e-mini future by making a higher low. During periods of confirmation like this, traders might feel stronger about their stock or futures positions that are held in the direction of the major market trend.
The Volume Accumulation is a technical analysis tool that combines both price and volume. Other similar technical indicators include Chaikin Oscillator (see: Chaikin Oscillator) and Money Flow Index (see: Money Flow Index).
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