We knew it was only a matter of time, but old school technical analysis - like looking at volume - is working. One of the hallmarks of the rally since August, 2010 was that the only analysis that mattered was to buy every dip no matter what. Just buy, the Fed has your back. I am sure more than one person said, "this stuff doesn't work anymore." Don't worry Mr. Market has a way of punishing those who take their eye off the ball, and just when you decide to ignore an important indicator or data point, suddenly it becomes the indicator to watch.
For those paying attention and who did not give up on "old school", there has been significant distribution going on in this market since February, 2011. In other words, greater the majority of the above average volume days have been down days. Since February 18, there have been 76 trading days, and 24 of those have been down days on above average volume. By comparison, there have been 11 trading days that were positive on above average volume. Figure 1 is a daily chart of the S&P Depository Receipts (symbol: SPY) with volume bars in the lower panel. The late February, early March distribution is identified with the gray oval, and the recent down slide is identified by the gray rectangle. The selling on increasing volume is undeniable.
Figure 1. SPY/ volume/ daily
To look at the volume pattern in a different light, figure 2, a daily chart of the SPY, shows the on balance volume indicator (in green) with its 40 day moving average (in blue). The OBV is not only below its 40 day moving average, but the moving average has rolled over. The OBV indicator made a high in late February, 2011 (point 1 on chart) and has been trending lower since. It is lower than the March low, but price has yet to breach this level.
Figure 2. SPY/ OBV/ daily
In sum, old school TA is working. Whether it is back in vogue or not is debatable, but just when the majority investors catch on the market will serve up another curve ball.