Bear Market Volume: Getting Technical

Bear Market Volume: Getting Technical
August 3, 2009

Last week we featured some commentaries on trading volume during bear market bottoming processes (1929, 1973, and 2000) to get some perspective on the current price-volume relationship.

Today, let's examine the topic from a technical perspective, courtesy of some analysis provided by Serge Perreault, a Chartered Accountant located near Montreal, Canada. Serge points out that all our charts exhibit some form of Inverse Head And Shoulders(IH&S) formation. As the Investopedia link explains, "Many traders will watch for a large spike in volume to confirm the validity of the breakout."

Here's an annotated chart of the Dow Crash of 1929 and the following rally. The IH&S was a second-take affair. The first breakout above the neckline aborted. About six months later a second breakout succeeded. The heavier volume powered the second rally.

The recovery from the 1973 oil crisis was a simpler IH&S pattern. With the breakout, volume increased and maintained the elevated levels for six months or so.

Like the Crash of 1929, the initial rally off the bottom of the Tech Crash aborted. A more successful rally came six months later. Volume was a factor, although less so than in the two earlier illustrations.

Which brings us to today's market. We've had a breakout above the neckline of an IH&S pattern but with low volume compared to the sharp increase in price. Will this rally abort? The relatively low volume so far doesn't bode well for a continuation. Nor does it mesh with the bullish bias of the popular financial media.

We shall see.