SPRING

1991

ISSUE 37

A PUBLICATION
71 BROADWAY,

OF THE MARKET
2ND FLOOR,

C/O NYSSA

TECHNICIANS
NEW YORK,

ASSOCIATION

NEW YORK 10006

(212) 344-1266

The Use of Price-Volume

in Technical Analysis
S. Kris Kaufman

Price-Volume

Crossover

PRICE-TIME
A
P
Fi
I
C
E

Patterns

and Marc Chaikin

Abstract:
Background
and Methods. The routine
use of price-volume crossover signals as a means of
forecasting future stock or commodity price movement has been gaining popularity lately due to the
availability
of software to simplify the analysis. In
this study we tested 24 unique crossover patterns
and identified their forecasting performance. Crossovers are classed by both pattern and the elapsed
time for the pattern to develop. For each pattern, we
analyzed how much better one could forecast price
direction 5,10,15, and 20 days in the future, given
that the elapsed time for the cross to develop spanned
TITLE:

Crossover

the same number of days. We used approximately

one hundred and twenty five thousand days of daily
stock and commodity data bundled together in our
evaluation. At least 100 occurrences for each crossover pattern were used in the analysis.
Results: The results suggest that several patterns are significant and could be used to improve
a stock or commodity price forecast. The most negative cross within the test window was II-B, which
occurs when price drops on decreasing volume, rises
on light volume and then drops again on increasing
volume. It was interesting that the converse pattern

Derivations

VIEW

0
1

P
PRICE-VOLUME

o,,j$,

VIEW
2

IIIIII

II>

TIME
VOLUME-TIME

P
R

\
VIEW

C
E

1
3

X>

VOLUME

TIME

Figure 1: DERIVATION

OF PRICE-VOLUME

CROSSOVER

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I-B is not
show that
after the
technique
tegration

as bullish as II-B is bearish. The I-B results

you will generally move up immediately
cross, only to fall later. The utility of this
is its ease of use by computer and the inof price and volume which is achieved.

linked to the crossing of two price-volume lines. Ben

Cracker, for one, has long been a proponent of pricevolume charting and has studied some of the basic
patterns as well as pattern groupings. In this study
we will test each of the 24 basic single cross patterns
on four time periods using very diverse stock and
commodity data.

Introduction
Market technicians usually study time-based
charts in order to identify price and volume patterns.
There is a large body of technical knowledge about
the combinations
of price and volume behavior that
lead certain types of market price action [Bring et
al.]. The price-volume chart provides a different way
of viewing the data. In fact, the two major reasons
for using this view are that it leads to a single indicator integrating
price and volume and the data can
be easily tracked by computer. The identification
of
these patterns on the price-volume chart has been
TITLE:

PriceVolume

Crossover

FINAL

Patterns

y-2.1

I -0.2

10

0.8

15

0.4

VOLUME

lg~-~~~

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VC .Ij:J(E
5

I -1.4

,viiii

VOLUME

VOLUME

VOLUME

VOLUME

Figure

36

lB

VOLUME

P
R
I
C
I
E

PRICE
INCREASES
VOLUME
INCREASES

SEGMENT:

Crossover Patterns
The price-volume view is formed by plotting
the closing price on a vertical axis versus volume on
a horizontal axis (Figure 1). Each day a new point
is added and then connected to the previous days
point by drawing a line. For this discussion we will
refer to the final segment as the most recent
price-volume line. The initial
segment is the one
which occurred further back in the past and is
crossed by the final segment. Crossover patterns are

I -1.6

classified by the direction of the initial and final

segments, and by the elapsed time between them.
The pattern shown in figure 1 shows price rising on
increased volume (1 to 21, then declining with the
same level of volume (2 to 31, before finally rising
on decreasing volume (3 to 4) to complete the pattern. The dashed line indicates that an unknown
number of days may have elapsed between the initial
and final segments. There are 24 patterns in all (Figures 2 through 5). The patterns have been divided
into four groups based on the direction of the final
segment. Each of the figures shows one of the four
final segment possibilities
with all possible initial
segment choices.
Analysis

The best way to judge the benefit of using crossover signals is to analyze the actual price action
TITLE:

Price-Volume

FINAL

Crossover

Patterns

II
P
R
I
C
I
E

PRICE
DECREASES
VOLUME
INCREASES

SEGMENT:

following a certain crossover. Within a particular

time frame, more than one crossover pattern may
complete They have different initial segments with
the same final segment, but they still occur together
in terms of the evaluation. We have chosen a simple
least-squares approach to solve for the relative importance of the crossovers. This approach neatly separates each pattern by assigning it a weight as part
of a linear sum. Figure 6 shows the least-squares matrix equation Aij * Wj = Bi, where the As are zeros
or ones depending on whether one of the 24 crossovers occurred within the analysis window, the Ws
are the unknown pattern weights, and the Bs are
the answers to what happened next in the market.
If the market went up after 5 days (or any fmed numher), a plus one is entered. Otherwise, a minus one
is used. Since we have so much data (roughly 125,000
days), the problem is very well constrained. The re-

\
VOLUME

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I -1.1

10
15

I -5.5
I -3.8

I -0.5

20

I -2.3

5 I -3.9
I -0.7

10
15
20

L+

ix

VOLUME

I -0.2

10

I -1.7

15
20

I -2.8
I -2.0

VOLUME

VOLUME

I -4.6

I -4.1

I -8.1

10

I -1.3

10

I -0.8

10

I -0.9

15
20

I -2.9
I 1.6
iE

VOLUME

g:i:l

iF

gi

VOLUME
Figure

VOLUME
3

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sulting weights will tell us whether a pattern is

bearish (W < 0) or bullish. Also note that we added
a constant term to the weighted sum model to pick
up any price trend bias over the whole data set. This
turned out to be positive 1 to 2% which is due to the
80s bull market.
The equation was solved for four cases. All
crossovers occurring within 5 days coupled with the
resulting price behavior 5 days out, and the same
for 10,15, and 20 days. The results are shown in the
upper right hand corner of each pattern on figures
2 through 5. The weights may be interpreted as an
average percentage deviation from the random case.
In other words a 5.2 weight indicates that the pattern predicted higher prices about 5% better than
random. When the weights flip-flop between positive
and negative without any clear pattern, the crossover has little or no significance in forecasting.
TITLE:

Price-Volume

FINAL

Crossover

SEGMENT:

Patterns

PRICE
VOLUME

In evaluating the results it is apparent that all

patterns with the same final segment do not have
the same forecasting utility
(see Figure 7). One
might expect that days following a move higher on
increasing volume (figure 2 patterns) would always
be more positive, independent of the crossover. Our
results show that patterns I-C and I-F predict very
negative price action 5days out, before turning and
becoming very positive later. Other members of that
group, including I-A, I-B, and I-C show no clear pattern, while I-D is positive early and negative late,
the opposite of I-C and I-F. Group II however, does
show universally negative behavior, but there are
two patterns which are much more negative than the
rest. Table 1 is a summary of the signiticant results.
Discussion
The results suggest that several of the price-

Ill
P
R

DECREASES
DECREASES

C
IIE

VOLUME

iA

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10

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38

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I -0.2

5
10

VOLUME

1991

I -5.6

VOLUME

g=-

Figure

1 -6.2

Jjl:::

VOLUME
5 1 -0.8
10 I 1.2

iD

5
10

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4

I -5.4
I -4.8

volume crossover patterns are significant and could

be used to improve a stock or commodity price forecast by generally +/- 5%. It is interesting to note
that down moves are much more easily forecast
using price-volume patterns than up moves. Also, the
group II pattern results suggest that any time one
sees a price drop on heavy volume, a hasty exit is
in order.
The most negative cross within the test window was II-B, which occurs when price drops on
decreasing volume, rises on light volume and then
drops again on increasing volume. It was very
interesting to note that the converse pattern I-B is
not as bullish as II-B is bearish. The I-B results show
that you will generally move up immediately
after
the cross, only to fall later.

TITLE:

Price-Volume

FINAL

Crossover

PRICE
VOLUME

SEGMENT:

5
10
15
20

Patterns

Cracker,
Report,
M.

Benjamin
B., The Computerized
Investor,
The
320 West California
Blvd., Pasadena,
CA 91105,

Pring,
Second

Martin,
Edition,

C
I/
E

5
10
15
20

x-1.3

Analysis

Explained,

McGraw-Hill,

T
VOLUME
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I 4.4
I 2.8
1 3.1

0.8
0.0
1.4

5 I

5.2

VOLUME
5 1 -3.9

iE

10 I
15 I
20 1

.p,102

VOLUME

5 1 -9.2
10 I -2.8
15 I -2.5

Technical
1985.

Cracker
Volume

P
R

INCREASES
DECREASES

VOLUME

REFERENCES

IV

I -3.1
I 2.5
I 2.6
I 2.5

The use of the price-volume crossover technique is a practical way of integrating

two charts into
one for analysis. Since a computer can easily be programmed to pick out these patterns, this indicator
should continue to gain in popularity over time. Further study should be devoted to combining crossover
patterns with other technical indicators, analyzing
weekly and monthly data, and also to special sequences of these patterns.

gy=

(F

<-ii:

6
VOLUME

VOLUME
Figure

VOLUME
5

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r
TITLE:

Crossover Evaluation using Lea3bSqwre~~

WAS THE MARKET HIGHER
OR LOWER 5 DAYS IN THE
FUTURE?

MATRIX EQUATION:
PAlTERN
WEIGHTS
24 Patterns

>

--

--

1
1
-1
-1
1
-1

Wl
w2
w3

0 0 1 0 0 0 1 o....

=
125,000
Days
of Data

-1 = LOWER
1 = HIGHER

IL

A
IS THERE A NO. 3
CROSSOVER
TODAY

--

1 = YES
O-NO

--

Figure

TITLE:

Crossover

P
R
I
c

6: LEAST-SGUARES EOUAllON TO SOLVE FOR CROSSOVER WEIGHTING

Pattern Evaluation

SET OF ALL MARKET DAYS WHEN

PRICE WAS UP ON DECREASED
VOLUME FROM THE PRIOR DAY

2
VOLUME

ON INCREASED

Flgure 7: PATTERN

40

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EVALUATION:

I SFFLING

1991

HOW DIFFERENT

ARE CROSSOVER

CASES FROM THE NORM 3

VOLUME

TABLE

Pattern
I-C

Description
Price is up strongly on increased volume followed later by price up less
with more volume.
Price is down strongly on slightly decreased volume followed later by price
moving up strongly with increasing volume.

I-D
I-F

Price is up somewhat on greatly

up more on less volume

II
(all)

increased volume

III-B
III-C
III-F
IV-A
IV-B
IV-D

Action
Late

DOWN

UP

UP

DOWN

DOWN

UP

DOWN

DOWN

DOWN

UP

DOWN

DOWN

DOWN

DOWN

DOWN

DOWN

DOWN

UP

UP

DOWN

DOWN

followed later by price

Price decreases on increasing volume. Note that II-B and II-F are very
negative patterns within the group.
Price is up slightly on large volume increase followed later by a strong
price decrease on decreased volume.
Price moves down on increased volume followed by price drop on decreased
volume.

III-A

Price
Early

Price is down strongly on slightly lower volume followed later by smaller

decline on much lower volume.
Price is down slightly on much lower volume followed by greater decline
on slightly decreased volume.
Price is down slightly on increased volume followed by a higher price on
decreased volume.
Price increases on increased volume followed by a price increase on
decreasing volume
Price decreases strongly on slightly higher volume followed by a rising
price on much lower volume.

Kris Kaufman
is a senior geophysicist
with a leading
oil exploration
software
company
and president
of
Parallax
Financial
Research.
Parallax
publishes
the
PRECISION
TURN
trend change indicator
quarterly
and provides
computer
research and consulting
services
to several
Wall Street firms.
Marc Chaikin
graduated
from Brown
University
with
a degree in Finance
He was the head of the Options
Department
at Tucker Anthony
fir five years Later Marc
joined Drezel Burnham
Lambert
and for five years he
worked
with technically
oriented
traders and investors.
Two years ago he, along with his partner
Bob Brogan,
firmed
Bomar Securities,
L.P, a technical
research boutique with a computer-based
product
which gives buyside portfolio
managers
and block trading
desks quick
and easy access to technical
data. Marc is a frequent
guest analyst on FNN, is often quoted in Investors
Daily
and recently wrote an article fir Wall Street Computer
Reviews
July issue titled Technical
Analysis
Systems:
A Users Perspective:

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1991

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