Market signals behind volume contraction and price decline: Master 5 trading secrets of volume-price relationships

In stock technical analysis, volume-price relationship is an important indicator that should not be ignored. Whenever stock prices fluctuate, the changes in trading volume behind them often imply the true attitude of market participants. Today, we will delve into what the volume-price relationship is and reveal the market signals conveyed by 5 common volume-price combinations.

What is the volume-price relationship?

The essence of the volume-price relationship refers to the interaction pattern between stock price movements and trading volume. This is the foundation of technical analysis, reflecting the ebb and flow of buying and selling forces in the market. When stock prices rise or fall, the accompanying trading volume directly reveals the market’s level of participation.

The following table summarizes the characteristics and market implications of 5 typical volume-price patterns:

Price Rise, Volume Shrinks: Hidden Concerns in Uptrend

Stock price increases should generally delight investors, but if during the upward process the trading volume becomes increasingly thin, it warrants caution. This phenomenon usually indicates that market participants lack confidence in the rally, and buying momentum is gradually waning.

Price rise with shrinking volume often reflects increased market hesitation, with insufficient buying support for further gains. In other words, the upward movement may be a technical rebound rather than a trend, making a pullback highly likely.

Real Case Verification

In early 2017, Tesla stock exhibited typical features of price rise with shrinking volume—steady price increase but declining daily trading volume. This suggests that although the short-term trend is upward, its sustainability is questionable.

A similar phenomenon also appeared in Alibaba’s stock trend. When the stock price continued to rise but volume decreased instead of increasing, it often signaled a decline in market participation and a lack of momentum for further gains.

Price Flat, Volume Shrinks: Stagnation and Boredom

Stock prices oscillate within a narrow range, while trading volume continues to decline—that’s the typical picture of volume-flat with shrinking volume.

This combination reflects a market stuck in a stalemate, with investors’ positions ambiguous and lacking clear directional judgment. The market seems to be waiting for new catalysts to break the deadlock.

Market Case Analysis

Nvidia’s stock once experienced a long period of sideways consolidation, with the price fluctuating within a specific range, while trading volume gradually decreased. This indicates that the market lacked confidence in the stock’s future direction.

Boeing’s stock also showed similar signs—no clear trend in price, but volume kept shrinking, with market participation cooling down significantly.

Explosive Volume Drop: Concentrated Reflection of Market Panic

A rapid decline in stock price accompanied by a huge increase in trading volume is one of the most harmful volume-price patterns. It usually signals a dramatic shift in market sentiment, with many investors selling off stocks, creating a panic atmosphere.

An explosive volume drop can indicate a deeper correction or present a buying opportunity for sharp-eyed investors.

Typical Case Review

In early 2020, during the initial outbreak of COVID-19, global stock markets experienced extreme volatility. Leading hotel stocks like Hilton underwent a sharp explosive decline—stock prices plummeted in a short period, with trading volume surging, reflecting investors’ extreme concern about the pandemic’s impact on tourism.

However, not all explosive volume drops predict greater disaster. For example, Estée Lauder’s stock plummeted after its Q3 2023 earnings report, with volume soaring as the market overreacted to underwhelming results. Subsequently, the stock rebounded, creating substantial gains for timely investors.

Volume Shrinks, Price Falls: Quiet in Decline

Stock price is in a downward channel, but trading volume does not increase—in fact, it gradually shrinks—this is the feature of volume-shrinking with falling price. This situation usually indicates declining market participation, with investors paying less attention to the stock, and the decline lacking strong selling pressure.

Volume-shrinking with falling price can be a short-term correction or a sign that the market has lost interest.

Example Verification

In 2018, Netflix experienced a prolonged downtrend, but its volume kept shrinking. This reflects that although the price was falling, market participation was limited, and the downward momentum was relatively mild.

Facebook also showed a similar trend in summer 2022—long-term lack of major positive news, with the stock price continuously declining and volume decreasing, indicating a cooling market interest.

Price Falls, Volume Rises: Dual Possibilities at Turning Points

When stock prices decline but trading volume increases, this seemingly contradictory combination hints at complex market psychology.

An increase in volume during a price decline may indicate continued selling pressure, but it can also signal a bottom formation, where savvy buyers are accumulating at lows.

Case Comparison Analysis

At the end of 2018, Apple faced dual blows from sluggish iPhone sales and US-China trade tensions, with its stock price dropping sharply amid surging volume. The market was undergoing intense repositioning during this period.

The story of Blackberry is even more instructive. In 2012, amid the smartphone wave impact, the stock price continued to decline, and panic selling increased volume. Yet, in this extreme pessimism, some investors began gradually building positions, eventually leading to a bottom and a remarkable rebound.

Investment Insights from the Comprehensive Use of Volume-Price Relationship

The core logic of volume-price relationship is: A healthy upward trend should be accompanied by increasing volume, while a mere price increase with declining volume is often illusory; similarly, strong declines require volume support, and declines with no volume are less concerning.

Deep understanding of these five typical volume-price patterns helps investors more accurately identify the true market trend and avoid false signals. But it is especially important to emphasize that the volume-price relationship is just one dimension of technical analysis; comprehensive investment decisions should also incorporate other technical indicators, fundamental analysis, and macroeconomic environment.

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