Corey Rosenbloom: I’ve been highlighting the trend of distribution volume in the S&P 500 ETF (NYSEARCA:SPY) since April, and that trend continues presently.

Let’s take a quick update on what volume suggests about the health of the stock market:

We continue to see phases of Distribution Volume as price rallies and retraces from May to present.

To recap, one of the basic principles of Technical Analysis is the relationship between Price and Volume – some traders make their decisions using only price and volume (though most of us prefer additional indicators for extra information).

In general, when price rises in an uptrend and volume also shows a trend of rising, this is a form of confirmation and thus suggests that the trend is healthy and should continue.

However, when price is rising in an uptrend and volume shows a pattern of declining, this is  a non-confirmation or divergence which suggests that the uptrend is weaker than price suggests and that a reversal – or at least a deep retracement – is favored.

The same logic is true in a downtrend – falling price and rising volume is a confirmation that suggests the downtrend should continue.

Falling prices and falling volume – a non-confirmation/divergence – suggests weakness of the downtrend and that it may reverse/fail in the near future.

Taken together, we can use volume to assess the health of trends in motion.

What are we continuing to see presently?

Volume continues to increase as price swings lower, and volume tends to decline as price swings higher.

This suggests a broader pattern of Distribution and that caution is warranted (lower prices tend to be favored when price and volume are showing Distribution Patterns).

This has been the case recently, as I’ve highlighted in two prior similar updates:

May 11: Update on SPY and DIA Distribution Volume

April 11: April trend towards Distribution Volume in the US Equity Markets

Take a moment to review those posts for additional information (and to see what the picture looked like in real-time).

Unless we see a sudden reversal of these persistent patterns (we have to monitor real-time developments as they occur), caution is still warranted in this environment of distribution volume.

Related:  S&P 500 Index (INDEXSP:.INX).

Written By Corey Rosenbloom, CMT From Afraid To Trade

My name is Corey Rosenbloom, CMT (Chartered Market Technician)  trader, educator, analyst, and I am excited to share with you my  experiences studying and trading the markets and to hear from you  regarding your experiences, challenges, and frustrations, and successes.  My goal is to create a community dedicated to reaching out to those who  have been burned by the market or are anxious about risking their money to make money in the stock, options, or futures markets. Together, we can share strategies and learn how to overcome crippling fears that keep  us from achieving our highest potential.

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