Climactic Volume & How It Identifies Tops and Bottoms
What is Climactic Volume?
As we have discussed many times before, volume analysis is the single most important factor in helping a trader determine if there is true buying or selling activity going on within a stock. This article is going to discuss the most important volume indication, climactic volume. This is a large increase in volume that occurs after a strong move higher or lower and gives the trader an insight into the greed or fear that exists in the marketplace. Climactic volume is a great tool in locating market tops and bottoms on any timeframe, from the intraday charts to monthly charts.
There is a common misconception that climactic volume in the direction of trend is considered to be a sign of continuation. It is actually the opposite; climactic volume indicates panic buying or selling. After a strong move higher, an explosion in volume indicates that buyers are buying to avoid missing further price appreciation. This is where the amateurs get caught and where the professionals take advantage. Sit on your hands when you see this type of action and resist the urge to "get in" on the action. Remember, professionals buy into fear and sell into greed. That is the only way they can make money; to do the opposite of what the general public is doing.
How much Volume is considered Climactic?
Typically, when you see volume spike anywhere from 200% to 300% above the average 20 period volume; this would be considered climactic.
One other note about climactic volume; like any other tool, this one cannot be isolated and traded on its own. You want to keep an eye out for candlestick reversal patterns such as the shooting star. Also, keep Fibonacci levels and the tape in mind when analyzing the setup.
Climactic Volume Charting Example