By Gary Panice

I trade S&P E-minis, and, when I'm doing well, the markets talk to me. I'm here today to draw your attention to the story that volume tells in short-term trading. As a day trader, I spend a large portion of my time looking for trend reversals. Nothing screams trend reversal like climax buying or selling volume. Volume moves price. Stochastics and MACDs hold a prominent place in my analysis, but volume is clearly "the man".

A volume surge may be the red flag that an extended move could be ending and setting up for a reversal. A volume surge is most likely what is necessary to move price out of a trading range and into the next tradable trend.

Let's look at a 10-minute filter. Needless to say, the longer the time frame, the longer the duration of the ensuing move. In the example provided in this article, we see price / volume climaxing at approximately the 1500 level. Stochastics are oversold and moving sideways long before and not providing much of a clue that the move down may be ending. If we have a position, we can lighten up here or at least be aware of a possible tone change. This action is followed by a normal-looking reaction, and we have defined a trading range. Our trade is setting up.

Our next expectation can be a test of the climax level on diminished volume. Stochastics and MACDs often provide us with classic divergences at these levels, and this time is no exception. Note that the buy signal coincides with the downtrend being broken. The ensuing move off the lows is 20 plus points, but, more realistically, we are offered a good entry and a solid stop loss point.

After that run-up, notice how volume dries up on the next reaction. Are we building a base for the next move up? Keep listening; volume will speak.

*Reprinted (and modified) with permission from Gary Panice