At market bottoms, volume is simply a coincident indicator, volume spikes on the day of the selling climax and the stock market turns back up. Volume spikes also occur on buying climaxes, but market tops do not necessarily top out on the day of the heavy volume buying climax. This is a function of market tops. Short or intermediate market tops can be coincident with buying climaxes or that can be a lag time of 1 day to 1 month. These buying climaxes can occur at or near momentum or secondary highs, sometimes these buying climaxes occur on major market tops as well.

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We saw a buying climax in the Dow Jones on April 22 2010. The buying climax is an indication that investors now believe in the economic recovery story, they are voting with their pocketbooks. The April 22 high volume reference day can be seen as a bullish signal, because the herd can be right at certain junctures but not necessarily over the course of the next 1-6 weeks.

The chart above shows three statistically significant volume spikes set near short term stock mkt highs following the bear mkt low of March 6 2009. A short term high was set on Sept 23, three days after the Sept 18 buying climax. Likewise the Jan 20 high was preceded by a buying climax one month prior on Dec 18. Prices in both instances sold off below the Sept 18 and Dec 18 buying climax lows, putting all those convinced the market was going higher underwater for a spell.

Let’s look back to three buying climax volume spikes clustered around the Jan 14 2000 primary bull market high.

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The first buying climax was April 19 1999. Price spiked that day too, and closed near its lows of the day, so that was a sure sign of distribution, but it was not a major mkt high. Three weeks later a short term high set on May 13 1999 and a major mkt high formed 9 months later on Jan 14 2000.

One month prior to the final Jan 14 2000 high, another high volume buying climax set on Dec 17 1999. Both the April 19 and Dec 17 1999 high volume buying climaxes were leading indicators we were closer to a stock market high than a bottom. Less than 4 months after the final bull mkt high on Jan 14 2000, another high volume buying climax occurred on April 4, 2000. That was also the price high. There was no lag time between the volume and price high on April 4 2000, so in this instance, it worked out that the buying climax was a coincident indicator.

One year later, high volume buying climaxes acted as a coincident indicator on Jan 4 2001, and a 5 week leading indicator on May 22 2001. Incidentally, the spring of 2001 was the last time I have ever written about volume as an indicator. The fact that I am taking notice of volume again nearly a decade later is a bit noteworthy in itself. I rarely find volume to be so statistically significant to warrant any mention.

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The next occasion that volume was statistically significant or relevant was on Dec 14 2004. Two weeks later a significant mkt top was reached on Jan 3 2005. Other than a blip above the Jan 3 high on March 7 2005, that Jan 3 2005 high set the high for the rest of the year until Nov 2005. See next chart.

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