Stocks & Commodities V.

28:7 (40-45): Volume, The Forgotten Oscillator by Martha Stokes, CMT

The Energy Behind The Move

Volume, The Forgotten Oscillator

This oscillator can expose the amount of energy behind a price move. versa. Being able to identify an increase in volume (which
indicates increasing energy for the stock) or a shift in direc-
by Martha Stokes, CMT tion can help the short-term trader determine the duration and
sustainability of the current price action. This can help screen
ost traders know the popular price oscillators: stochas- out weaker stock picks and ascertain when to exit a trade.

M
tic, the relative strength index (Rsi), Williams’ %R, In today’s institutional activity–based market, the volume
price rate of change, and so forth. Price oscillators are oscillator can reveal buying and selling patterns before price
second only to the moving average convergence/diver- begins a major move. This is because many of the large institu-
gence (Macd) in popularity and use by retail traders. tions are careful not to disturb price as they buy incrementally.
But few traders know about or use volume oscillators, a On the daily chart of Kirklands, Inc. (Kirk), as price
far more important category. While price oscillators are used moves up during the October–December period, the volume
mostly to reveal overbought and oversold price conditions oscillator pattern forms lower highs, indicating a weakening
with a high and low percentage range, volume oscillators of upside energy (Figure 1). However, a spike exhaustion
JESSICA MARZURKIEWICZ

can help identify the energy behind the move. pattern during the correction in January forewarns of an ex-
haustion pattern to the downtrend as high-frequency trad-
Volume oscillators ers sell short for one day and then move on. The February
Volume oscillators can expose market energy of all kinds as volume oscillator cycle fails to bottom and the upside price
well as reveal the shift of energy from up to down and vice action resumes. By studying these patterns carefully, the re-
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 28:7 (40-45): Volume, The Forgotten Oscillator by Martha Stokes, CMT
INDICATORS KIRKLANDS ORD
22.0
21.0
20.11
20.0
19.0
tail trader can anticipate and prepare 18.0
17.0
for reversals and retracements prior to 16.0
price actually changing. 15.0
14.0

How the formula works 13.0

12.0
The standard volume oscillator avail- 11.0
able for most charting software is a cen- Volume Oscillator

ter line oscillator. Instead of oscillating 200

between a high range and a low range 150
100
the way most price oscillators do, cen- 50
ter line volume oscillators move above
0

TECHNITRADER.COM
-50
and below a zero line. The center line -100
exposes the volume energy behind the
-150
14 21 28 5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 19 25 1 8 16 22 1 8 15 22
price action for both buy and sell sides. October November December 2010 February March
By watching the volume oscillator as Figure 1: ANTICIPATING REVERSALS AND RETRACEMENTS. From October to December, the volume
well as a pure price oscillator such as oscillator pattern forms lower highs, indicating a weakening of upside energy. A spike exhaustion pattern during
stochastic, traders take their analyses the correction in January forewarns of an exhaustion pattern to the downside trend. The February volume oscillator
cycle fails to trough and the upside price action resumes.
to a more analytical level to anticipate
price changes before price reverses on
the short-term trend. Being able to an-
Stochastic Oscillator

ticipate price action well ahead of the 50

event is a decided advantage when the
market is moving with velocity.
Volume Oscillator

The example you see in Figure 2 of 50

the volume oscillator formula turns at 0
the zero line. The formula calculates -50
the percentage of deviation from an
exponential moving average (Ema) to Figure 2: how the volume oscillator works. The volume oscillator calculates the percentage of
identify significant changes to volume deviation from an EMA to identify significant changes to volume from the norm.

for this particular stock. The Ema can

be adjusted in the formula to adapt to CATERPILLAR ORD

trading styles and the current market 65

64
condition. In this example, the short- 63
62
term Ema is set at 12 periods and the
61
60
58.90
long term is set at a 28-period Ema
59
58
57
with a time series method. 56
55
The volume oscillator is an ad- 54
53
vanced analysis tool that aids in iden- 52
51
tifying underlying changes to short- 50
49
term sentiment. Volume oscillators are
48
47
ideal for professional high-frequency Volume Oscillator

traders, daytraders, swing traders, and 100

velocity traders. Position traders may 50

also find this indicator useful during
platform market conditions. 0

Extreme patterns -50

As with all indicators, the volume os- 14 21 28 5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 19 25 1 8 16 22 1 8

October November December 2010 February March
cillator can indicate extreme patterns to
both the upside and downside action. FIGURE 3: EXTREME PATTERNS. The volume oscillator exposed the weakening volume action prior to a top
forming. Here, the exhaustion pattern on the volume oscillator occurs often just before a topping action as the last
Extremes warn of a change in direction surge of late buyers rush in on speculation and as high-frequency traders trade the stock intraday in January.
for the short-term price action. Extreme
ranges occur when the oscillator exceeds its normal range. The cillator exposed the weakening volume action prior to the
oscillator will move sharply to the top or bottom of the chart, forming of a top. The exhaustion pattern on the volume os-
often forming a near-vertical angle of ascent or descent. cillator occurs just before a topping action as the last surge
Figure 3 of Caterpillar (Cat) shows how the volume os- of late buyers rush in on speculation and as high-frequency
Copyright (c) Technical Analysis Inc.
 Stocks & Commodities V. 28:7 (40-45): Volume, The Forgotten Oscillator by Martha Stokes, CMT
INTERNATIONAL BUSINESS MACHINES ORD INDICATORS
135
134
133
132
131
130
129
128
127.60
as extreme readings that may not be as
127
126 evident in volume bars alone.
125
124 The volume oscillator is easy to read
123
122 with its center line. As the volume in-
121
120 dicator moves up above the center line,
119
118 it indicates accumulation or rising in-
117
116 terest in the stock to the buy side. As
115
114 long as the indicator remains above
Volume bars, Volume
and/or oscillating near the center line,
150000 buyers will dominate stock activity and
10000 the bias will remain to the upside on
5000 the short-term trend. When the volume
0
x1000 24 31 8 14 21 28 5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 19 25 1 8 16
oscillator heads down and moves well
September October November December 2010 February below the center line, a distribution or
Volume Oscillator selling pattern is occurring. For short-
term trading, this can be profit-taking
after a big move up.
50
0

Contradicting price
-
-50
10 17 24 31 8 14 21 28 5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 19 25 1 8 16
August September October November December 2010 February oscillators
One of the most important advantages
FIGURE 4: APPLYING THE VOLUME OSCILLATOR. The volume oscillator exposes cyclical patterns in volume when using a volume oscillator in con-
and extreme readings in volume that may not be as evident in volume bars alone.
junction with a price oscillator such
as stochastic or the Rsi is when a con-
tradiction occurs between the volume
oscillator and the price oscillator. Such
INTERNATIONAL BUSINESS MACHINES ORD
125
120 contradictions are known as divergenc-
115 es or convergences between indicators.
110 In Figure 5, you can see an example
105
of a contradiction between the stochas-
tic and volume oscillator. The stock is
100
95
90 building a platform, a common side-
85 ways pattern that develops as insti-
Stochastic Oscillator
tutional investors move into a stock
without moving price out of a tight
50 range. Institutional investors are the
Volume Oscillator
most dominant of the eight market par-
ticipant groups and their activity often
50 goes unnoticed because they use con-
0 trolled bracketed orders that maintain
-50 price at certain levels.
9 17 23 2 9 16 23 30 6 13 20 27 4 11 18 26 1 8 15 22 29 6 13 20 27 3 10 17
Stochastic is dropping below its
February March April May June July August
overbought 80% line while the volume
FIGURE 5: CONTRADICTING PRICE OSCILLATORS. The stock is building a platform, a common sideways
pattern that develops as institutional investors quietly move into a stock without moving the price out of a tight oscillator is heading upward as the
range. Stochastic is dropping below its overbought 80% line while the volume oscillator is heading steadily upward platform develops. This creates a con-
as the platform develops. This creates a convergence pattern between stochastic and the volume oscillator. This vergence pattern between the stochastic
pattern is a leading indication that the platform will break to the upside. and the volume oscillator. This pattern
is a leading indication that the platform
traders trade the stock intraday in January. The spiking pattern moves well beyond will break to the upside, which can be
the normal range. The subsequent peak fails and forms a significantly lower high a critical piece of information for po-
in February and March. sition and swing traders, trading plat-
forms, and earning strategies.
How and when to use it Platforms are common sideways
There are numerous ways you can use a volume oscillator to speed up your trade patterns that form after bear markets
analysis. Volume oscillators aid in the analysis of volume bars as seen in the and intermediate-term corrections and
chart of Ibm in Figure 4. The volume oscillator exposes cyclical patterns as well during value-oriented market condi-
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 28:7 (40-45): Volume, The Forgotten Oscillator by Martha Stokes, CMT

tions. These slower-moving uptrends

build lengthy tight sideways action that
tends to follow earnings reports during
slower economic and business cycles.
Ibm formed a lengthy platform dur-
ing August and September in Figure 6.
INTERNATIONAL BUSINESS MACHINES ORD
130
Stochastic floated from late July to ear- 127.60
125
ly August and then slipped downward
during the platform stage. However, the 120

volume oscillator continues to rise dur- 115

ing this period, followed by an upside 110
breakout move in October.
The value-oriented market creates
105

a slower platform-building pattern for 100

most stocks. Being able to see the ac- Stochastic Oscillator

tivity of the institutional investor mov-

ing in before price moves helps traders 50
enter these platforms prior to breakout
moves, gaps, and runs.
Volume Oscillator

50
0
Floating stochastic -50

and volume oscillator 29 6 13 20 27 3 10 17 24 31 8 14 21 28 5 12

July August September October
During moderately trending markets,
when most price oscillators fail to oscil- FIGURE 6: PLATFORM FORMATIONS. IBM formed a lengthy platform pattern during August and September.
late but form a floating pattern at their Stochastic floated from late July to early August and then began to slip downward during the platform stage.
However, the volume oscillator continued to rise during this period followed by an upside breakout move in
overbought line, a volume oscillator can October. Being able to see the activity of the institutional investor moving in before price moves helps traders
be an invaluable analysis tool for swing enter these platforms prior to breakout moves, gaps, and runs.
and velocity traders, exposing weaken-
ing price action before a retracement.
The chart of Tam (Tam) in Figure 7
TAM ADR RPSTNG 1 PRF

26
shows a spike on the volume oscillator 25
during a platform and prior to the move
24
23
up. This is often indicative of heavy in- 22
21
stitutional investor activity that tends 20
19
to use controlled bracketed orders that 18
17.55
17
do not move price during the accumu- 16
lation phase. As the stock moves up,
15
14
the volume oscillator hovers around its 13
12
center line, indicating steady consistent 11
10
volume activity until December when 9
the volume oscillator suddenly forms a
Volume Oscillator
250
divergence with price, just prior to the 200
150
topping action. 100
50
0
Volume oscillator
-50
-100
and gaps 29 6
July
13 20 27 3 10 17 24 31 8 14 21 28 5
August September
12 19 26 2
October
9 16 23 30 7
November
14 21 28 4
December 2010
11 19 25 1 8
February
Platforms and bottoms often have huge
gapups due to institutional short-term FIGURE 7: FLOATING STOCHASTIC AND VOLUME OSCILLATOR. Here you see a spike on the volume
and high-frequency traders who trade oscillator during a platform and prior to the move up. This is often indicative of heavy institutional investor
activity. As the stock moves up, the volume oscillator hovers around its center line, indicating steady consistent
speculatively when they discover that volume activity until December, when the volume oscillator suddenly forms a divergence with price just prior to
their counterpart, the institutional inves- the topping action.
tor, has been accumulating. Their large-
lot speculative buying patterns drive
price up in sudden, explosive moves.
The volume oscillator can be a useful
tool in finding stocks poised for a huge
Copyright (c) Technical Analysis Inc.
 Stocks & Commodities V. 28:7 (40-45): Volume, The Forgotten Oscillator by Martha Stokes, CMT
INDICATORS

gap or runaway price action. In Figure 8,

in the chart of Gymboree Corp. (Gymb),
you see a floating stochastic as the vol-
ume oscillator turns upward and moves
above its center line. Although price is
sideways, volume is building energy dur-
GYMBOREE ORD ing this bottoming phase.
Figure 9 shows the gap that formed
53
52
51.38
51
50
49 on Gymb shortly thereafter. The volume
oscillator indicated heavy buying activity
48
47
46
45
44 in Gymb prior to the huge gap. Stochas-
tic was in a momentum floating pattern
43
42
41
40
39
38
that did not signal to enter the stock at
Stochastic Oscillator that time. By using the volume oscillator
90
80 with stochastic or any other price oscilla-
70
60 tor, the swing and velocity trader is able
to enter the stock prior to the gap price
50
40
30
20
10 action, thereby increasing their profits
Volume Oscillator
200
significantly.
150
Buying exhaustion patterns
100
50
0
-50
-100
During velocity (that is, momentum)
21 28 5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 19 25 1 8 16 22 trades, the volume oscillator can fore-
October November December 2010 February warn of a buying exhaustion pattern even
FIGURE 8: STOCHASTIC AND VOLUME OSCILLATOR. Here you see a floating stochastic as the volume while stochastic floats, signaling early
oscillator turns upward and moves above its center line. Although price is in a sideways pattern, volume is that the run is losing energy as price ad-
building energy during this bottoming phase. vances upward. In Figure 10 you can see
that a negative divergence between price
GYMBOREE ORD and volume has occurred, indicating ear-
ly that price action is losing energy.
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51.38
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50
49
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46
Subindicators with
45
44 volume oscillator
A variety of subindicators can be applied
43
42
41
40
39 to the volume oscillator to facilitate in
faster analysis and more subtle nuances
38
Stochastic Oscillator
90
80
of the indicator cyclical patterns. For
70
60 short-term trading (such as intraday, day-
trading, swing, or velocity), the use of an
50
40
30
20
10 Ema, rate of change, or linear regression
Volume Oscillator lines applied to the volume oscillator to
create another indicator line can be use-
200
150
ful to further sharpen the analysis pro-
100
50
cess. Convergence and divergence pat-
0
-50
terns between the volume oscillator and
-100
5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 19 25 1 8 16 22 1 8
October November December 2010 February March the subindicators can help a trader enter
FIGURE 9: VOLUME OSCILLATOR AND GAPS. The volume oscillator indicated heavy buying activity in GYMB or exit the stock more quickly before a
prior to the huge gap. Stochastic was in a momentum floating pattern that did not signal to enter the stock at sudden price move.
that time. By using the volume oscillator with stochastic or any other price oscillator, you are able to enter the The chart of Google (Goog) as shown
stock prior to the gap price action. in Figure 11 reveals an Ema applied to
the volume oscillator. The 25-day Ema
exposes the weakening pattern for the
volume oscillator even before the vol-
ume oscillator moves below its center
line. This gives a short-term trader extra
time to plan the best exit strategy.
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 28:7 (40-45): Volume, The Forgotten Oscillator by Martha Stokes, CMT
GOOGLE CL A ORD

600
581.140

Summary 550

The volume oscillator can be an additional 500

analysis tool to use with price oscillators
to help expose strengthening or weaken- 450
ing volume patterns that often precede
changes to price action and direction. Stochastic Oscillator

As with all indicators, the volume os-

cillator requires study and practice to use 50
it properly and learn its nuances. Extreme Volume Oscillator
oscillation patterns can reveal shifts of 50
sentiment and bias from buyers to sellers 0
and from short sellers to buyers. The indi- -50
cator is ideal for short-term trading styles 27 3 10 17 24 31 8 14 21 28 5 12 19 26 2 9 16 23 30 7 14 21 28

and can show buying patterns of the insti-

August September October November December

tutional investor during platform markets FIGURE 10: BUYING EXHAUSTIONS. Here you see that a negative divergence between price and volume
when price appears to be listless. Institu- has occurred, indicating early that price action is losing energy.
tional investors control price through the
use of bracketed orders that contain their
buy entries within a tight price range. GOOGLE CL A ORD
However, the volume oscillator can ex-
pose the surge of buying even while price 600
remains in a narrow price range. This al- 581.140

lows the retail trader to buy in before the 550

sudden breakaway gaps or large runs out
of the platform. 500

The volume oscillator is an advanced

indicator and should be used by traders 450

who have plenty of trading experience

and a strong knowledge base of price Stochastic Oscillator

oscillators and other indicators. Begin-

ning traders, however, will need to first 50

learn price oscillators and various vol- Volume Oscillator

ume indicators before attempting to use 50

the volume oscillator. Adding a volume 0

oscillator to your indicator toolkit can in- -50

crease your profit potential and help you

27 3 10 17 24 31 8 14 21 28 5 12 19 26 2 9 16 23 30 7 14 21 28
August September October November December
anticipate a change to price action before
FIGURE 11: SUBINDICATORS WITH VOLUME OSCILLATORS. Here you see an EMA applied to the volume
it commences. oscillator. The 25-day EMA exposes the weakening pattern for the volume oscillator even before the volume
oscillator moves below its center line. This gives a short-term trader extra time to plan the best exit strategy.
Martha Stokes is a Chartered Market
Technician and a member of the Market
Technicians Association (Mta). The author of Cycle Evolu-
tion Theory and a popular lecturer, Stokes is a master-rated _____ [2007]. “The Missing Cycle,” Technical Analysis of
technical analyst for Decisions Unlimited and codeveloper Stocks & Commodities, Volume 25: April.
of the TechniTrader stock market trading courses, work- _____ [2007]. “What’s Your Trading Style?” Technical
shops, and virtual classes. In addition, she writes several Analysis of Stocks & Commodities, Volume 25: Bonus
educational newsletters for active traders. To learn more, Issue (no. 4).
visit www.technitrader.com or www.marthastokes.com or _____ [2006]. “Tools Of The Trade,” Technical Analysis of
call TechniTrader at 888-846-5577. Stocks & Commodities, Volume 24: November.

Suggested reading
Stokes, Martha [2007]. “The Angle Of Ascent,” Technical
Analysis of Stocks & Commodities, Volume 25: Sep-
tember.
S&C

Copyright (c) Technical Analysis Inc.