Price/Volume Charting Long-Term
Monday, March 17, 2003
Fred Goodman

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A long term Price/Volume Chart is plotted the same way as the daily, but instead of plotting the daily price and volume, we use the 5-day averages instead. The purpose of this discussion is to compare the present market to past market bottoms occurring both in a bull market and in a bear market.

What I plan to illustrate, is that the bear market bottoms differ from the bottoms occurring during an ongoing bull market. I will also explore the possibility of determining if a market rally occurring at the end of a secular bull or a secular bear, is different from those made at the end of shorter term cyclical market moves.

To help us get oriented, I have marked on the long-term chart of the Dow Jones Industrial Average, below,  the major bottoms reached during the last 5 years.

Dow Jones Industrial Average
1995 To the Present

To begin, here is the present condition of the market as seen in the long term Dow Price/Volume Chart. We have just started to advance following a steady decline over the last three weeks. If the advance continues, it is likely that a counterclockwise pattern will be completed.

In every market decline I have studied for this report, the volume increased as the market fell. This is certainly logical, because not only do more and more investors become frightened as the market falls, but more and more stock is sold short during the decline. Last week, on Thursday, the market exploded on big volume as shorts covered their trades and bottom fishers grabbed bargains. This has moved the chart to the right as both price and volume increased. As you will see below, this is not the only way a decline can end -- there can also be a shriveling of the volume after the storm.

5-Day Average Dow Price/Volume Chart
Through Friday, March 14th

Last October, and for that matter, in several previous reversals after a bottom that you will see below, the market fell steadily on increasing volume and then advanced on slowly decreasing volume. In each of these periods, the rally brought generally higher volume with it than did the decline, and the result was the generation of a large, counterclockwise pattern.

5-Day Average Dow Price/Volume Chart
October 2002 Bottom

In stark contrast to the above, in October 1997 during the bull market, prices declined on steadily increasing volume as before, but the advance occurred on less volume than did the decline. The pattern, therefore, was clockwise instead of counterclockwise. Clockwise patterns, you will remember, are bullish, while counterclockwise patterns are bearish. The small loop, made on very low volume represents the brief rally in between the two declines making up the "W-shaped" bottom that marked the end of the decline in 1997. What could be the cause of the marked difference in volume patterns? One contributing factor is, I'm certain, the fact that there was much less short selling during the bull market than there has been during the bear. Another possibility is the fact that the total volume in the 2002 decline was twice that traded during the 1997 decline. This too is expected since bear markets are caused by investors fearfully dumping stocks, while declines in bull markets are the result of a drying up of volume.

5-Day Average Dow Price/Volume Chart
October 1997 Bottom

A year later, in October 1998, we find exactly the same pattern. The market declined on increasing volume and then recovered slowly on decreasing volume, making a clockwise loop. A similar outcropping on much lower volume marked the middle of this "W" shaped bottom.

5-Day Average Dow Price/Volume Chart
October 1998 Bottom

The tentative conclusion from these observations is that rallies after declines in bull markets tend to be clockwise in nature, while rallies after declines in bear markets tend to be counterclockwise. This is consistent with the decades-old interpretation of "clockwise" being bullish and "counterclockwise" being bearish, but it also forces the expectation of further weakness ahead of us, after the current Summary Index buy signal comes to an end.

Here is the October 1999 chart, and it too was counterclockwise. One could make the case that this is evidence that the market "knew" that this was the prelude to the big bear market about to start just a few months later. However, as you will see below, it is not quite that easy to come to that conclusion.

By the way, note the loop within a loop in the chart below. This was another "W-shaped decline." When it ended, there began the final intoxicating rally before the abyss.

5-Day Average Dow Price/Volume Chart
October 1999 Bottom

The February 2000 bottom saw a low volume decline that ended with a huge increase in volume as the market fell very slowly. It was followed by an explosive rally on huge volume and then a sudden drop in volume as the market attempted one last assault on the all time high above 11000. The shriveling volume during this rally certainly is clear in retrospect, there was no support left for advancing prices. The fact that this market bottom was also counterclockwise, may be helpful in accessing the strength of future recoveries.

5-Day Average Dow Price/Volume Chart
February 2000 Bottom

Here is the fly in the ointment -- March 2001 was the only clockwise, bottoming pattern in the bear market, with the exception of 9/11, the discussion of which follows. It is interesting to note that the advance following this bottom was the only one since the market top that produced a new interim high.

5-Day Average Dow Price/Volume Chart
March 2001 Bottom

The rally following 9/11 was totally distorted because the surprise event caused the closing of the markets for 4 trading days. When the markets reopened, trading volume was exactly double that leading into the event, and it did not return to pre-attack levels for another 10 trading sessions. To give us an idea of what it might have been like if the price change and volume changes that happened between the 10th and the 17th, when the markets reopened were spread across the 4 missing days, I have redrawn the chart with the volume and price changes averaged over the 4 days, as if the market had been open. That chart follows the actual one just below.

5-Day Average Dow Price/Volume Chart
September 2001 Bottom

Lo and behold, the chart has now reversed itself to counterclockwise, the recovery pattern to be expected in a bear market.

5-Day Average Dow Price/Volume Chart
September 2001 With an adjustment to replace the 4 days that didn't happen

To complete the picture, here is the July 2002 bottom -- another counterclockwise pattern.

5-Day Average Dow Price/Volume Chart
July 2002 Bottom

In conclusion, there is considerable evidence to support the expectation that a counterclockwise rally in the long term Price/Volume Chart, following a sharp decline in a major bear market, will simply be a bear market rally, and will not mark the end of the secular bear.

Fred Goodman, CFP, is a fee-only Certified Financial Planner based in Los Angeles. You can send him your questions and comments via email at The charts and commentary represent what Fred is thinking about the market and thinking of doing for his own account and for accounts he manages. There is no guarantee that you will profit from trading as discussed herein. You may lose money and Fred assumes no responsibility for what you do or do not do with this information.