Volume Oscillator divergences occur when there is an increase or decrease in price which is accompanied by a decrease in volume. When this divergence occurs, the fast volume moving average (default 14-period) is below the slow volume moving average (default 28-period) and the Volume Oscillator is below the zero line. These divergences are warnings that the current price direction is lacking strength and there is potential for a trend reverse.
An example of a Volume Oscillator divergence is presented below in the chart of the E-mini Russell 2000 Futures contract:
When the price was increasing in the Russell 2000 e-mini, the Volume Oscillator was not confirming the price movement because it was decreasing making repeated lower highs and lower lows. This bearish divergence indicated that the recent price increases were not being made with volume strength. The bearish divergence was confirmed when the e-mini future's upward trendline support was broken.
However, when the Russell 2000 e-mini futures contract made its downturn, the Volume Oscillator confirmed the price downtrend by making higher highs and lower lows, a signal that volume was increasing and thus indicating that the trend downward had strength.
The Volume Oscillator is a helpful addition to any technical trader's toolbox. Analyzing volume gives traders another viewpoint for analyzing potential trades. To learn more about interpreting volume, see: Volume.
