From trading volume to stock price reversal: Recognize rebound signals during volume-price divergence

In stock investing, many people only focus on price fluctuations, but they overlook an equally important piece of information—the trading volume. In fact, the interaction between stock price and trading volume often reveals the market’s true intentions in advance. When these two diverge or align, investors can often spot opportunities where the market has mispriced assets.

What is the volume-price relationship? Why is it worth paying attention to?

The volume-price relationship refers to the interaction pattern between stock price movements and their accompanying trading volume. Simply put, it involves observing changes in trading volume to assess the market participation and confidence behind price increases or decreases.

This concept is important because it reflects the true thoughts of market participants. A rise with high volume indicates broad buying support, while a rise with declining volume suggests insufficient buying interest—these two scenarios often lead to very different future market performances.

Here are five common volume-price combinations in the market and their characteristics:

Volume-Price Relationship 1: Price rises, volume shrinks—A fleeting rally

When stock prices continue to rise but trading volume gradually diminishes, investors should be alert. This phenomenon indicates that the market’s confirmation of the uptrend is weakening, and buying support is clearly insufficient.

For example, in early 2017, Tesla’s stock price kept rising over a period, but each upward move was accompanied by decreasing volume, hinting at weak new buyer interest. Similar situations also appeared during certain upward phases of Alibaba—prices rose while trading remained light, usually signaling a short-term technical rebound rather than a trend reversal.

Key takeaway: Price rises with shrinking volume suggest the upward momentum may be exhausted. Investors should evaluate whether to take profits or stop chasing the rally at this point.

Volume-Price Relationship 2: Price flat, volume shrinks—A period of brewing

When a stock oscillates within a certain price range with decreasing volume, it often indicates a stalemate in the market. Investor sentiment is cautious, and the market lacks clear directional signals.

Nvidia experienced months of sideways trading with declining volume, reflecting hesitation among market participants. Boeing faced similar conditions. This state often foreshadows a significant directional move—markets are gathering strength.

Volume-Price Relationship 3: Explosive volume decline—The most dangerous warning sign

A sharp decline in stock price accompanied by a surge in trading volume is the most concerning combination. It usually indicates extreme pessimism among investors, with many rushing to sell in panic.

During the COVID-19 outbreak in 2020, Hilton Hotels (HLT) saw its stock plummet within days, with massive trading volume. Fears about the pandemic’s impact on tourism triggered panic selling. This volume-price pattern often signals that a deeper correction may be imminent.

However, a sudden volume surge during a decline can also present opportunities for savvy investors. For instance, Estée Lauder (EL) reported quarterly earnings below expectations in 2023, causing a sharp drop in stock price with increased volume, but subsequently, the stock rebounded significantly—panic overshot the negative impact.

Volume-Price Relationship 4: Volume shrinks, price declines—Quiet decline

When a stock declines with decreasing volume, it usually reflects low market engagement. Unlike the panic of explosive declines, a volume-shrinking decline often indicates that investor sentiment is relatively calm and may just be a technical correction.

Netflix experienced a prolonged decline in 2018 with light trading, indicating the market was not in panic mode. Facebook also saw similar conditions in summer 2022—gradual price decline without significant positive catalysts, with volume continuously decreasing. In such cases, additional information is needed to determine whether it’s a correction or a trend change.

Volume-Price Relationship 5: Price declines, volume increases—A key signal before a rebound

This is the most noteworthy of the five patterns. When a stock’s price falls but trading volume increases, the market is often experiencing an emotional shift. Although it appears to continue downward, the increased trading activity often signifies that bargain hunters are accumulating.

In late 2018, due to weak iPhone sales and US-China trade tensions, Apple’s stock was heavily hit, with a significant increase in volume. Looking ahead, this was actually the market bottoming out and beginning to gather upward momentum.

A classic example is BlackBerry (BB) in 2012. As the smartphone wave pushed feature phones out of the market, investor pessimism grew, and the stock entered a long decline. But as the price kept falling, volume gradually increased—indicating some investors believed the stock was undervalued and started buying. The stock eventually bottomed and rebounded.

This pattern tells us: a decline in price accompanied by rising volume is often an early indicator of a potential upward move. Smart investors use this signal to identify opportunities where the market has overly discounted the stock.

How to apply the volume-price relationship in practical trading?

Observe trend confirmation: If an uptrend is accompanied by high volume, the trend is strong; if volume diminishes during an uptrend, exercise caution.

Identify reversal signals: Pay special attention to the pattern of falling prices with increasing volume, as it often signals a shift in market sentiment.

Risk management: During explosive volume declines, prioritize risk control unless you have already identified it as panic-driven overselling.

Combine with other indicators: Volume-price analysis is just one tool; it should be used alongside moving averages, RSI, and fundamental analysis for better decision-making.

Summary

The volume-price relationship in stocks essentially quantifies market psychology. A decline in price with increasing volume is an important early warning of a potential rise, while a rise with shrinking volume signals weakening momentum. Investors should not only watch prices but also learn to interpret the stories behind market sentiment.

By understanding these five typical volume-price patterns, investors can more keenly identify market turning points and seize opportunities ahead of others’ hesitation. Remember: Trading volume is the pulse of a stock; grasping volume changes unlocks the code to price movements.