The New Year is off to a good start with several breakouts making gains of over 25% already. ACHN (Achillion Pharmaceuticals) has gained over 50%,  VOXX (Voxx International) reached a 35% intraday gain over its breakout price and NQ (NetQin Mobile Inc) jumped 28%.

The NASDAQ Composite has been rising steadily but the volume trend is downward so we wonder how long the momentum can be sustained. There are many headwinds facing the economy, as Nouriel Roubini explains here but perhaps the source of optimism driving the markets higher is obtained in this observation by Roubini: "Given the bearish outlook for US economic growth, the Fed can be expected to engage in another round of quantitative easing." QE3 may not help the economy, but it will certainly move stocks higher. If so, the NASDAQ faces resistance almost immediately at less than 1% above its Friday close and then again at 2863.

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More on the Importance of Volume

In the commentary above we said of the NASDAQ "the volume trend is downward so we wonder how long the momentum can be sustained." So where does this concern about falling volume while prices are rising come from?

In "Technical Analysis of the Financial Markets" John J. Murphy describes it like this: "The level of volume measures the intensity or urgency behind the price move. Heavier volume reflects a higher degree of of intensity or pressure". Or more succinctly "volume should increase or expand in the direction of the existing price trend".

So when we see the price trend rising but the volume level falling, then that indicates that the intensity of support for the existing price trend is waning and hence our concern.

When price rises and volume expands we say that a stock is under "accumulation" and when price declines but volume expands we say that a stock is under "distribution". The concepts of accumulation and distribution are therefore important because they combine measures of price movement and volume. When stocks start to come under accumulation, we want to be a buyer and when they start to come under distribution, we want to be a seller.

We use accumulation and distribution in our proprietary turning point algorithm as confirmation of price trends measured by the stochRSI. You can see these at work in our "Trend Reversal Signals" tool where we show price, smoothed StochRSI and smoothed Acc/Dis together.

This understanding of the importance of volume was originally contained in a series of editorials published in the Wall Street Journal at the turn of the 20'th century written by Charles Dow. These have come to be known as  "Dow's Theory".