A Pioneer of Volume Analysis by James A. Maccaro Students of volume aim to use data about the number of shares traded to judge the likelihood of the continuation of current trends and to anticipate future trends. This branch of technical analysis applies to the market as a whole, market sectors and to individual securities. At its simplest level, volume is the number of shares traded during a particular period. Under most methods of analysis, daily volume is used. Harold Gartley was a pioneering student of volume. He began his career in 1912 and was active through the 1960’s. In common with legendary Wall Street figures such as Bernard Baruch and Jesse Livermore, Gartley began his career as a “board boy” for a brokerage house. His job was to write the latest stock prices on blackboards displayed in the firm’s lobby for customers. He soon progressed to become a stockbroker and analyst. From 1934 to 1947, Gartley ran his own research company, which was one of the leading independent securities analysis firms of the day. He was also one of the founders of the New York Society of Security Analysts and, in the late 1940’s, began a public relations firm specializing in investor relations. Gartley presented his ideas about volume in numerous articles and speeches and in a book published in the 1930’s, entitled Profits in the Stock Market. Gartley rhetorically asked, “is it volume which causes price changes, or do price changes cause volume -- the hen or the egg, which came first?” He did not answer this question because he saw volume not as a trigger of events, but rather as a barometer of market conditions. He equated volume with “market pressure,” which he concluded depends on the supply and demand of stocks. Gartley advocated four primary general rules about volume. First, when an increase in volume is coupled with a significant price change, either higher or lower, prices are likely to continue in the same direction. Second, a decrease in volume indicates that prices are likely to change direction. Third, volume of a speculative issue usually increases as the price moves up, reaching a peak just prior to the stock reaching its highest price. Conversely, volume will decrease as the price declines. Fourth, volume increases during a bull market and decreases during a bear market. Bear markets, Gartley asserted, “begin in great activity and end in pronounced dullness.” Gartley made a distinction between volume when a stock’s prices is increasing and volume when it is decreasing. He designated the number of shares traded during price advances as “demand volume” because he concluded that the volume was driven by increased demand for the stock. The number of shares traded during price declines is “supply volume,” because, according to Gartley, it is caused by investors dumping shares and thereby increasing supply. Under Gartley’s system, increasing supply volume (i.e., increased trading during periods of price declines) and decreasing demand volume (i.e., decreased trading during bullish trends) are bearish indicators. Conversely, increasing demand volume (i.e., increased trading during a bull market) and decreasing supply volume (i.e., decreased trading during periods of price declines) are bullish indicators. Furthermore, Gartley asserted that if volume sharply increases after a period of rising prices, and the price advance slows or stops, this suggests that the balance between supply and demand has shifted and that prices will decrease. Likewise, a decrease in volume after a bearish trend indicates that prices have stabilized and that the downward pressure has eased. According to Gartley, high levels of volume initially characterize bear markets. He cited the period from November 1929 to April 1930, when volume increased immediately following the Great Crash of October 1929. Gartley attributed this to the combined forces of the increased supply of stocks and increased demand. The increased supply at the beginning of a bear market is triggered by investors covering losses, whom he called “liquidators,” but they are matched by an increase in demand because of purchases by optimists hoping to obtain bargains. After observing the markets for several decades, Gartley developed a detailed chronology for typical bear markets. Initially, optimists enter the market in the belief that price drops are temporary and offer a tantalizing opportunity for quick profits. In our own time, this process became enshrined as “buying on the dips.” However, as the bear market persists, fear grows. Supply volume then reasserts itself. As investors recognize that they might get caught in a bear rally, rather than a true market turn-around, they become increasing eager to sell, even at unattractive prices. At this point, “liquidation” will continue but the demand for stocks by the optimists will fall off. As prices continue to decline, the attractiveness of “bargain hunting” further erodes because of fears of future declines. Potential buyers are discouraged, which causes demand to decline. At the same time, supply increases because many people who bought at the earlier stages of the bear market join the “liquidators.” As panic sellers leave the market (having sold all of their stocks, most at significant losses), and are joined on the sidelines by the disillusioned former-optimists, volume will reach low levels. Gartley concluded that not until “the force of liquidation is spent” will a bear market end. Bull market volume, according to Gartley, is initially relatively low because a bull market usually evolves from the “extreme dullness” that characterized the end of the preceding bear market. However, as the bull market gains strength, demand volume will increase until it reaches a “crescendo” that continues during the peak of the bull market but then falls off as supply volume asserts itself. Gartley applied his analysis of volume to both the general market and to individual securities. He also asserted that the ratio of volume for a particular stock to the volume for the market as a whole is important. He labeled these relationships as “volume ratios” and stated that increasing volume ratios provide confirmation of other bullish or bearish indicators relative to that stock. Conversely, a decreasing volume ratio suggests that a trend is about to change. Gartley based his studies of volume on his experiences on Wall Street during much of the 20th century, particularly the boom years of the 1920’s and the bust that followed. His insights about volume provide a valuable starting point for today’s investors. |
Wall Street Cosmos
Research Report: Volume Analysis