If you are into technical analysis, the first thing you probably learned is volume is key.
Well, that's partially correct.
What is really key is volume levels and volume trends. They are a leading indicator to determining market trend and direction. Volume is one of two primary indicators, the other being price action.
We will focus on the volume here, because as Jim Cramer says it is "like a polygraph test." There is no lying about where the money is flowing.
I look at volume prints on a raw and accumulative basis. Strong volume prints (3-5x normal or higher) indicate heavy institutional participation of buying or selling. If the price action confirms, we can perhaps see a trend established. We can the piggy-back a trade onto the trend.
I look for an accumulation of volume days -- a series of low-volume prints with higher prices raises a red flag for me. But toss in a strong turnover day with a price breakout and I'm much more likely to dismiss the prior low volume prints.
Chipotle shows a strong volume bar with good price action in January, but the standout was after earnings in February. That big bar led to a massive move up over time. And that is what we are looking for. Also, notice the increase in money flow after the next turn higher (arrow).
As for IBM, the earnings jump in January had spectacular volume, and the stock jumped. However, the follow-on move was even more impressive, a solid ABC move into the recent highs. Those were about 10% higher than the gap-up in January, so there's still time to follow the volume.
Volume won't always be as strong as you like, especially when the markets are near their highest levels. Indeed, we often see a lack of volume at these moments, investors preferring to "sit it out" and wait for the inevitable pullback.
The problem is, the low volume may just indicate a brief pause is happening before the next leg up, so those waiting around are stuck still waiting for that pullback, which may come from much higher prices!
With the volume trends, use breadth indicators, the McClellan Oscillator, summation index and new highs/new lows to confirm the health of volume. The secondary indicators are important tools that give us comfort in a volume print.