Understanding Market Sentiment Through Volume: The Polarity Indicator 

Content Details 

• Summary: This article explores how market sentiment can be gauged through volume analysis, focusing on the concept of polling by volume. It discusses recent observations where most high-volume days were on down days or pivot days, indicating trader unease with the current market uptrend and the potential for a polarity change. 

• Target Audience: Intermediate, Advanced 

Article Content 

Understanding Market Sentiment Through Volume: The Polarity Indicator 

1. Introduction: Volume analysis is a crucial tool for understanding market sentiment. By examining the volume of trades, traders can gain insights into the underlying mood of the market. One effective way to gauge this sentiment is through the concept of polling by volume, where the volume on specific days can indicate broader market trends and potential shifts. 

2. Polling by Volume: Polling by volume involves analyzing the volume of trades on specific days to determine market sentiment. High-volume days, especially on down days or pivot days, can indicate significant market activity and potential changes in trend direction. 

3. Recent Observations: In the last two months, most of the largest volume days have been on down or pivot days. This pattern suggests that traders are not entirely comfortable with the current upward grind of the market. The increased volume on these days indicates that many traders are selling or adjusting their positions, possibly in anticipation of a polarity change. 

4. Implications for Traders: 

• Trader Unease: The high volume on down days reflects a lack of confidence in the continued upward trend. Traders may be hedging their positions or exiting trades in anticipation of a market downturn. 

• Polarity Change: A potential polarity change, where the market shifts from an uptrend to a downtrend, could be on the horizon. Traders should remain vigilant and prepared for this possibility. 

• Monitoring Long Trades: While this pattern does not necessarily mean that long trades are wrong, it suggests that traders should closely monitor their positions and avoid complacency. 

5. Practical Tips for Traders: 

• Stay Informed: Keep an eye on volume patterns and be aware of high-volume days, especially on down days or pivot days. 

• Use Technical Indicators: Combine volume analysis with other technical indicators to get a more comprehensive view of market conditions. 

• Set Alerts: Use trading platforms to set alerts for significant volume changes, helping you stay ahead of potential market shifts. 

6. Example in SPX: Consider the SPX (S&P 500 Index). If the SPX experiences several high-volume down days within a short period, it may indicate that traders are selling off positions, signaling potential bearish sentiment. Traders can use this information to adjust their strategies accordingly, such as tightening stop-loss orders or taking profits on long positions. 

7. Conclusion: Polling by volume is a valuable technique for understanding market sentiment and predicting potential changes in trend direction. By staying attuned to volume patterns and remaining vigilant, traders can navigate the market more effectively and make informed decisions.