What is a low volume withdrawal?
A low volume shrinkage is a technical correction to a support area that occurs on a volume below the average. Since the movement occurs on a low volume, traders often attribute the pullback to weak long positions blocking profits rather than a reversal.
Key points to remember
- Small volume drawdowns occur when the price approaches support levels at below average volume.
- Low volume withdrawals are often a sign of low long-term profit taking, but suggest that the long-term uptrend remains intact.
- High volume withdrawals suggest that there may be a short-term reversal.
Explanation of low volume withdrawals
Frequent movements that occur in the opposite direction of a trend, which are accompanied by a small volume, are normal fluctuations and generally considered insignificant. On the other hand, a large increase in volume in the opposite direction of the trend could be used to signal that smart money is starting to look for exits and that the trend is about to reverse. These large downward movements are known as high volume withdrawals.
Negotiate low volume withdrawals
Many technical traders will try to position themselves on the short-term weakness observed in a low volume decline as this increases the risk / reward ratio because the stop losses are closer to the main support levels. Long-term investors can also take advantage of these opportunities to increase their positions at a lower price and decrease the cost base of their overall long positions, which creates an upside opportunity.
Traders will use indicators, such as volume on sale (OBV), to find situations where the trend and volume diverge. If the trend moves upwards and the volume decreases, trades can look for a potentially longer term reversal as there are fewer leads responsible for the stock increase. High volume withdrawals are also a sign that the market may be ready to reverse the trend. In these cases, long-term traders can exit their positions and long-term investors can lock in certain profits.
Traders often take many different factors into account when determining whether a withdrawal is temporary or long term. Although volume is a reliable indicator, it is also important to look at chart models, such as the main levels of support and resistance, and technical indicators, such as the relative strength index (RSI) or the moving average of convergence-divergence (MACD), to confirm these feelings.
Real example of low volume withdrawals
Here is an example of a series of low volume withdrawals in the SPDR S&P 500 ETF (SPY):
The chart shows three low volume withdrawals occurring in a significant uptrend before a high volume decline which signaled a more prolonged price reversal. Each weak volume decline was followed by a subsequent resumption of the general trend as weak traders pulled profits from the table before more bullish investors entered the market. In comparison, the steep decline in volume lasted several days and the ETF was considerably more volatile thereafter, with investors wondering if the long-term trend was still in place.