If Price is the king, then the volume is the queen.

This statement shows the significance of the price and volume relationship.

See, The investing world is full of Operators and Market makers, who have the tools to rig the price.

So, We use volume to know whether the price movement is legit or is moving abnormally.

We will talk about the basics of Volume in detail some other day, but today we will discuss how we can use it to find potential tops and bottoms.

Volume Climax

When the major tops and bottoms are formed two things happen:

The Public is buying and the Biggies are offloading their shares, generally after a prolonged uptrend

The public is selling and the Biggies are Hoarding up the shares, generally after a Prolonged Downtrend

In simple words, Volume climax is the last “ AHA ” moment for the Retail Traders before the price makes a major Top or bottom.

Like the Police in Bollywood movies is always late, the Retail also follows their path and always buys the stock when it’s near a major top and sells near the major bottoms.

Let’s understand how Volume climax Works.

When we learn about Volume, we are taught that the more the volume during a trend the better it is.

But, it’s only half the truth.

Too much of anything is bad and it’s true for volume also.

Volume climax appears at the extremes of a trend or late rallies in stage 2, that’s when the Major Tops and bottoms are formed.

What is Stage 2 in a Trend?

There are 4 stages in a stock: stage 1, stage 2, stage 3, and stage 4, which are also known as Accumulation, Markup, Distribution, Decline.

So, when a stock is late into stage 2 or markup stage we look for the signs of Volume climax.

Usually, after the 3rd or 4th base the stock is considered in the late stages of a trend, though it’s not something set in stone, sometimes stocks can show volume climax even after base 1.

What is a base?

In simple words, it’s a pause during a Trend, when the stock takes a breather or we can say it’s the resting area for stock before resuming the predominant trend.

A good base consists of at least 15-20 candles.

Like a trend can be on a 5 min candle as well as a daily candle, these stages can also be used on any time frame.

Though, Traditionally they are used on a daily and weekly Time frame.

Now let’s get back to the main topic.

Most of the times Volume climax appears when a stock breaks out after a long extending move-in stage 2, and then both the prices and volumes fail to hold at higher levels.

During this time, the prices and volumes will have their biggest increments as compared to the past few candles.

The candle size will be 2-3X of the last 20 candles and the volume will also be more than 5X of the 20-day average volume.

By seeing these big moves and volumes retail traders jump in to buy the stock as they thought that they just got the best chance to buy the stock before it moves higher.

And, during this time, The Big Money, the big boys are Dumping their shares to the public.

They create an illusion that this is the best time to own the stock and if you don’t buy it now you will lose the opportunity of your life.

This illusion is created by the use of Media, which hypes a stock so much that the public jumps to buy the stock.

And the Big money is successful in their mission, and now it’s time to dump the prices, and again buy from the retail at lower prices and this cycle repeats again and again.

Examples of Volume climax

Below is the chart of Astrazeneca pharma.

You can see that the stock went from 1900 to 4640, which is about 150% return in a year.

So the first criteria is met, as the stock has made a big move.

You can see that the stock got huge volume at the last candle and the volumes are also 10X of the average volumes.

Retail trades buy the stock out of FOMO, thinking the price and volume are showing very bullish signs.

The stock is showing all the signs of a Volume climax:

1. Late into stage 2.

2. The Last candle is More than 3-4 X the size of the last 20 candles.

3. Volume is 10-15 X of the 20-day average volumes.

4. Stock is extended.

What is an Extended Move?

An extended move is when the stock moves too big in a very small amount of time.

How big?

Though every stock is different and has a different level of Volatility, so moves are also different.

But, generally, if a stock is a Largecap then I consider it to be extended if it’s away more than 15% from the 50 DMA.

And If the stock is a mid-cap or a small-cap, I consider it to be extended if it’s more than 30% away from the 50 DMA.

If we are using a weekly chart then we have to use 10 WMA.

Now, let’s get back to our example:

The next day the stock made a high of 4970, which was 9% up from the previous day’s close.

The shares are dumped to retail, The volumes are even higher than the previous session, and the stock makes the biggest candle on the chart, and that is also negative.

It closed 7% below the previous day’s close.

The stock was extended as on the first big candle it was about 30% from the 50 DMA and the next day high was about 40% away from 50 DMA.

So, it was a perfect combination of an extended stock with volume climax, that will lead to a major top or at least a big consolidation.

The next day Stock opened 10% down, down 25% from the high it made one day ago.

After that, it went sideways for the next 4 months, before eventually going down.

One thing you would notice is the volumes fade away just after the big candles, and do not pick up to similar levels after that.

So it’s one of the properties of a Volume climax, if all the other criteria are matched but the volume picks up to the same levels even after the big candles, then it could lead to a failed volume climax and stock may go even higher.

Let’s take a look at another example of Volume climax:

Info edge shows the biggest bullish candle on the chart till the start of the trend, and volumes are 5X of the average volumes.

The Price is 30% away from 50 DMA and 14% from the nearest base.

It’s a recipe for Volume climax.

Let’s see how it fared after that.

The price went as much as 40% away from 50 DMA, and volumes were 10X.

Volume climax is confirmed, and then the price falls 30% in the next few days.

The volumes dropped significantly and did not pick up much after that, since then the stock is stuck in a big range.

Let’s look at another Volume climax example

The stock was up about 200% from its bottom and has broken out from 4 major bases.

In the last two candles, you can see the volumes were huge, about 10X of the average volumes, and the price was about 25% away from its 50 days moving average.

So, it has all the signs of Volume climax like 10X volume, Extended price action, 2X from the bottom (Late-stage 2), and away from the recent base.

But you might have a question: why didn’t we consider it to be the volume climax on the second last candle.

As it was also 15% away from the 50 DMA and Volumes were near 10X.

The answer to that is: That it was near its recent base, and when the price breaks out from a base, a good breakout always shows higher volume.

So, we wait for one more candle to let the price stretch and then take an exit from the stock.

Few more examples of Volume climax:

Bajaj auto is one of the perfect examples of volume climax.

Broken out from 3rd base, price stretched 20% from 50 DMA, and volumes jumped 10X, and the biggest price candle.

And this is how it fared after the Volume climax

Another Example :

Glenmark is an extreme example of volume climax. I think There was some news regarding vaccine development and the stock jumped 40% in a day.

Volumes went crazy, Size of the candle was huge, At EOD you can also see the rejection from the highs.

This is how it fared:

So, Is it a Holy grail technique that will work 100% of the time?

Nope, Like every other method out there, it does fail sometimes, but we do get signs of when it’s going to fail.

Let’s take some of the examples of when it did not work.

Tata motors is up 300% in the last 1 year and has broken out from 4 bases, so it could be in late-stage 2.

The stock picks up volumes and in the last candle, you can see the volumes jumped 6X.

Price is 40% away from 50 DMA and 30% from the nearest base.

Candles are also bigger though you can see similar size candles in the chart, Last two candles are still bigger than the last 20 candles.

So it has all the components of a Volume climax, Right?

Let’s see how it fared:

After the Climax candle, we should expect the volumes to dry up and not jump more than 50% of the climax day volume.

But you can see that the volumes picked up on the 3rd and 6th day after the climax.

So, it means that the stock has little more thrust left.

The stock keeps going up for the next few days, before going into consolidation.

You can see that the Volumes dipped for one day and then again retraced more than 50% of the fall, but over time it decreased, signaling momentum loss, which can lead to Consolidation or Fall in price.

There was another sign that the up move will last longer, the size of the candles during volume climax was not as big, as we need to see the biggest advancement in the price as well as volume.

If only the volumes increase and the size of the candles do not increase that could only lead to a minor consolidation in price, and not any major retracement.

I just found a very fresh example of Volume climax in the making, you can track this one for better understanding:

To find a perfect Volume climax, Keep these things in mind:

1. Price should be in late-stage 2 and not coming out of a Fresh trend.

2. Candle size should increase more than 2-3X and Volumes should increase more than 5X. (Ideally, both should be Largest since the start of stage 2)

3. Price should be more than 15% away in the case of Large-cap stock and 30% away from 50 DMA in case of a mid-cap or small-cap stock.

4. Volumes should dry after volume climax, if they are retracing more than 50% on Bullish days after the volume climax, the stock may have more steam left.

5. Price should be at least 10% away from its nearest base.

So, that was all for today from my side. If you think that this article will help you in any way, then please do help your friends by sharing this article with them.

Thanks for reading

Trader Knight