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The advancing and declining volume or the total volume of stocks that advanced and the total volume of stocks that declined every day can be used to create several market breadth indicators. One of these indicators is called the Up/Down Volume Spread. The indicator formula is simple; it is the advancing volume minus the declining volume (up volume minus down volume).
The composite formula returns a fast indicator or oscillator that moves quickly between positive and negative territory. A moving average can be used to smooth the Up/Down Volume Spread indicator.
The up and down volume data used by this composite is the sum of the volume traded on three U.S. exchanges, which are the American Stock Exchange, the New York Stock Exchange and the NASDAQ.
When the smoothed Up/Down Volume Spread line crosses above the zero line, the recent volume (depends on the period used for the moving average) of advancing stocks is outpacing volume of declining stocks and this is a bullish sign for the market. And when the smoothed Up/Down Volume Spread line crosses below the zero line, the recent volume of declining stocks is outpacing the volume of advancing stocks and this is a bearish sign for the market.
The indicator also gives another bullish sign when it reaches oversold area, that is, the indicator attains extreme high values (advancing stocks traded with higher volume than declining stocks). And a bearish sign when it reaches overbought area, that is, the indicator attains extreme low values.
Support and resistance lines can also be drawn on the Up/Down Volume Spread chart to analyze trends and to detect breakouts.
Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
