Bulkowski's Volume Study

Written and copyright © 2011 by Thomas N. Bulkowski. All rights reserved.

Volume Study: Summary

Here are the results of the study on volume which says that the move after a high volume breakout isn't as impressive as many believe. Failures double and the likelihood of a throwback or pullback triples.

• An upward breakout on above average volume propels the stock higher by just 1.8 percentage points.
• A downward breakout on above average volume sees price drop by 0.6 percentage points less.
• Failures nearly triple after an above average volume breakout.
• Failures more that double for downward breakouts, too.
• Price is three times as likely to throwback or pullback after an above average volume breakout.

Volume Study: Background and Methodology

For years now, I have looked at my daily charts with the volume scale turned off. In my blog posts, it's rare that I include volume. Why is that? My feeling is that volume is not important. New research seems to confirm that belief.

I looked over 8,000 chart patterns (samples) from July 1991 to May 2011, but included only rectangles, double and triple tops and bottoms. Those chart patterns have defined breakouts, meaning there's no guessing where a breakout might be since a breakout is either above the top of the pattern or below the bottom of it. That contrasts to something like a symmetrical triangle or broadening top which have slanting trendlines, a close outside of which denotes a breakout.

Then I compared the breakout day volume to the preceding 31 calendar days and the move after the breakout. The ultimate high is the highest high before price drops by 20%. The ultimate low is the lowest low before price rises at least 20%. If price had an upward breakout but closed below the bottom of the chart pattern, then the search for the ultimate high ended. A similar situation occurred for downward breakouts in the search for the ultimate low. I used the ultimate high and low to gauge post-breakout performance.

Volume Study: Results

I found that when price broke out of the pattern on above average volume, price climbed 37.6%, on average, before changing trend (dropping by at least 20% or slipping below the bottom of the chart pattern). When breakout volume was below average, the gain was 35.8%. So, a high volume breakout gives the trader a boost of 1.8 percentage points.

Downward breakouts show the reverse, losses of 15.1% to 15.7% for above and below average breakouts, respectively.

Volume Study: Failure Rates

Measuring the 10% failure rate (which asks how often does price fail to move more than 10% after a breakout?) shows that failures occur more often after a high volume breakout. The differences are significant, 14% versus 5% for upward breakouts on above/below average volume, respectively, and 28% versus 11% for downward breakouts, respectively. In other words, 14% of the chart patterns I looked at with above average breakout volume failed to see price climb more than 10%. Those with below average breakout volume failed just 5% of the time.

Chart patterns with above average breakout volume are at least twice as likely to fail than are those with below average breakout volume.

Volume Study: Throwbacks and Pullbacks

Here's another important finding. Price is three times as likely to throwback or pullback after an above average volume breakout. Throwbacks occur 57% of the time after an above average volume breakout versus 18% for those patterns with below average volume, and pullbacks occur 47% versus 17% of the time after above versus below average breakout volume, respectively.

Volume Study: Closing Position

After a high volume breakout, the move isn't much better than after a low volume breakout, failures increase (many are taught to avoid a low volume breakout), and the likelihood of a throwback or pullback triples. Throwbacks or pullbacks rob the stock of momentum and performance suffers.

-- Thomas Bulkowski

Written and copyright © 2011 by Thomas N. Bulkowski. All rights reserved. And the halftime score here at the Colosseum is Lions 7, Christians nothing. We'll be right back after these messages.