Volume, the Great Deceiver

Technicians are taught that volume will reveal the intention of price. In other words, we're trained to believe that short-term buying and selling pressure predicts longer-term price direction, intensity and timing, at least when it's interpreted correctly. But there's a problem with volume in our modern diabolical markets -- it doesn't tell the truth anymore.

OK, that's an exaggeration to some extent. There are still trading scenarios in which raw volume data and carefully analyzed accumulation-distribution indicators are vital to accurate price prediction. However, these are exceptions to the rule in this brave new world, in which an overreliance on the bottom half of the chart can get you into a lot of trouble.

Yes, you heard me correctly. Traders should just ignore volume patterns most of the time because it gets in the way of making money. This is a relatively new market phenomenon. Zoom back to 2000 or 2005 and you'll find that volume activity exhibited most of the predictive characteristics laid out in the classic technical analysis books.

But times have changed, with modern computer systems overwhelming the natural forces of supply and demand. Add the skyrocketing number of total transactions generated by orders being subdivided into micro units and it's become nearly impossible to make sense of the order flow of a typical market day, week or months.

Consider the three volume sources that are corrupting your nightly investigation of the stock market:

1. Pension and mutual funds, moving slowly and covering their tracks within the broad noise of daily market movement.

2. High-frequency trading algorithms, generating profits through minor fluctuations in the bid-ask spread.

3. Massive trading in index derivatives and exchange-traded funds that generate lockstep adjustments throughout the component shares.