CTA Volume Analysis & Market Breadth 1 — Questions and Answers
Question 1: In technical analysis, what does 'volume precedes price' mean?
- Volume always increases before a price move
- Changes in volume patterns often signal upcoming price direction shifts (Correct answer)
- High volume causes price to rise
- Price moves are proportional to volume
Correct answer: Changes in volume patterns often signal upcoming price direction shifts
Volume is considered a leading indicator because shifts in buying or selling pressure (visible through volume) often occur before they are fully reflected in price movements.
Question 2: On-Balance Volume (OBV) is calculated by:
- Averaging daily volume over 14 periods
- Adding volume on up days and subtracting volume on down days cumulatively (Correct answer)
- Multiplying price by volume
- Dividing price change by volume
Correct answer: Adding volume on up days and subtracting volume on down days cumulatively
OBV is a cumulative volume indicator developed by Joe Granville that adds the day's volume when price closes up and subtracts it when price closes down, tracking money flow.
Question 3: What does 'negative volume divergence' signal when price reaches new highs?
- A bullish confirmation of the trend
- Weakening buying pressure, suggesting the uptrend may be losing momentum (Correct answer)
- Increased institutional buying
- A breakdown below a key support level
Correct answer: Weakening buying pressure, suggesting the uptrend may be losing momentum
When price makes new highs but volume fails to confirm (declining on rallies), it indicates waning conviction behind the move, often preceding a reversal or consolidation.
Question 4: The Advance-Decline Line (A/D Line) measures:
- The ratio of advancing stocks to declining stocks on a single day
- The cumulative difference between advancing and declining issues over time (Correct answer)
- The percentage change of a market index
- Volume on up days versus down days
Correct answer: The cumulative difference between advancing and declining issues over time
The A/D Line is a breadth indicator calculated by cumulatively adding the daily difference between advancing and declining stocks, reflecting broad market participation.
Question 5: What is the significance of 'volume climax' or 'selling climax'?
- It confirms a strong ongoing downtrend
- Extremely high volume on a sharp decline that may signal exhaustion of sellers and a potential bottom (Correct answer)
- A breakout from a consolidation zone
- A period of very low volume near a price high
Correct answer: Extremely high volume on a sharp decline that may signal exhaustion of sellers and a potential bottom
A selling climax features panic-level volume on a steep price decline, representing exhaustion of selling pressure and often marking a significant low or trend reversal point.
Question 6: Which breadth indicator measures the percentage of stocks trading above their 200-day moving average?
- The Arms Index (TRIN)
- The McClellan Oscillator
- The percentage of stocks above MA200 (Correct answer)
- The New Highs-New Lows Index
Correct answer: The percentage of stocks above MA200
The percentage of stocks above their 200-day moving average is a breadth indicator that gauges the overall health of a market by showing how many stocks are in long-term uptrends.
CTA Volume Analysis & Market Breadth 1
In technical analysis, what does 'volume precedes price' mean?