Invest using volume analysis – with Buff Dormeier

Making good investments is so about having good timing.

You’ve done the research, you like what you see — but when do you pull the trigger? buff dormeier's book, investing with volume analysisWhat if there were a way to better your chances that your research is right?

Our guest today on Tradestreaming Radio, Buff Dormeier believes he’s found that way and it’s volume analysis. For Dormeier, volume is one of the great tells in the stock market for investors looking for direction.

Dormeier — the author of Investing with Volume Analysis and — joins us today to talk about:

  • technical analysis
  • how technical analysis can be used to complement fundamental analysis
  • why volume tells such a compelling story into future stock movements
  • where traditional volume analysis fails and how his theory improves upon it

Listen to the FULL Program

About Buff Dormeier

volume analysis by biff dormeierBuff is an award winning industry innovator and the developer of Volume Weighted Moving Averages (VWMAs), the VW-MACD, the Volume Price Confirmation Indicator (VPCI), VPCI Stochastics, the Anti-Volume Stop Loss (AVSL), the Trend Thrust Indicator (TTI), Capital Weighted Volume Indexes, as well as a host of cap weighted volume based breadth indicators.

Read the Transcript

Announcer: Live from the Internet, it’s Tradestreaming Radio with your host,’s own Zack Miller!Zack: Hey, this is Zack Miller, and you’re listening to Tradestreaming Radio, where investors learn directly from experts.

Today’s guest on the program is Buff Dormeier, the author of “Investing with Volume Analysis: Identify, Follow and Profit from Trends.” The book came out in March, 2011.

Listeners of the program know that I don’t focus a lot on technical analysis. I think Dormeier’s book does a great job of providing a synthesis for traditional, fundamental analysis along with technical. And certainly, people who are self- described as fundamental analysts can also learn from technical analysis, particularly where it lends itself to figuring out when you enter and exit a trade.

It’s a great book, both in terms of introducing just the basics of technical analysis, as well as getting into some of the more advanced topics. It focuses on volume analysis. Volume is a great tell for Dormeier, and most of his theories revolve around making better use of some of the volume trends. In fact, in 2006, Dormeier won the Dow Award for a paper on the subject, and he introduced his own indicator called the “Volume Confirmation Price Indicator.” He talks about that in the book, and we’ll learn more about that in the interview.

Much appreciated. Thank you very much for coming and listening to Tradestreaming Radio. If you’re listening to iTunes, you can find all of our archives there as well, but definitely come back to our website, We’re going to have more and more courses built upon some of the theories that we’re working on with some of our experts. We have our archives there as well, as well as show notes, and transcriptions of many of the programs. Definitely come back to Let us know what you’re thinking. If you’re listening to us on iTunes, feel free to give us a rating, or ranking, and let everyone else know the value you’re finding in this program. We appreciate your listening, and we’ll be back at you soon. Thanks, this is Zack Miller.

Can you start with telling me a little bit about your background?

Buff: I’m a Chartered Market Technician. is my website. I also work at a major brokerage firm, which I have to separate from my book, so I can’t name that. There’s a line of compliance there. I also do some speaking, and develop indicators on the side. I’m a portfolio manager, and I’m an analyst, and adviser. I wear three different hats.

Zack: On the unmentioned brokerage side, the portfolio stuff that you do, is it based upon the theories that you lay out in your book?

Buff: Absolutely. I would say that it’s a catalyst to my investment strategies, or my portfolios. I believe that a portfolio needs to have a performance driver. I use some of the techniques in my book, in different ways, to develop performance drivers in the selection of the securities I buy.

Zack: How does technical analysis resonate with retail clients? We’ve been trained to think of people in two camps: either you’re a believer, or you’re not. What’s the reception been with your client base?

Buff: Technical analysis is nothing new. Of course, it’s very old. It’s had some bad press over time. There are certainly analysts out there that continue to bring things to light. What I have to do is train people. Technical analysis isn’t magic; it isn’t tea leaves. What it is, is developing an opinion so that thereby you can gauge the health of the markets. That’s what I try to retrain people for. As you know, people have a variety of different perspectives, but I think overall, technical analysis is getting a much broader and much more accepted view by the public.

Zack: Can you attribute that to anything?

Buff: I would attribute that to one, when we’re in markets like this, there’s no atheists in foxholes. Everybody comes back to the belief of the trend. The market is what it is, and people, when it comes to making money, they’re going to be pragmatists. The charts certainly can help people with timing when the markets aren’t always moving up.

Zack: We’ve been conditioned by buy-and-hold philosophies. We don’t know how far the markets will go down. We don’t know the bottom. We can’t call the top, so we just sit pat. Using trends obviously moves against that type of accepted wisdom. Is it hard to unseat people from that?

Buff: It is in a bull market, but it’s certainly much more acceptable here in what I’d say would be a secular bear market. Preserving capital I think is people’s primary objective right now in the midst of this market. Using technical analysis techniques to preserve capital is extremely helpful and valuable, and people see the immediate benefit of that through risk management. I think that’s really where that comes into play.

Zack: Can you walk me through this? We’ll start at a high level. Are you using some of your theories in technical analysis to treat individual securities? Are you looking at markets? Are you trading ETFs? How do you use the screening process to find actual investment candidates?

Buff: All of the above, first. First I look at the broad market. That’s where I start and try to get a gauge of what’s happening with the broad markets. That’s more for tactics. Should I be buying, should I be selling, should I be tightening my stops, should I be loosening them? These sorts of decisions are made by looking at . . .

Zack: Can you be more specific? When you say broad market, you’re talking about something broader than the S&P 500?

Buff: I’m looking at the S&P 500, for instance. That’s pretty much what I use to gauge the health of the market is the S&P 500. I’m looking at the price, the trend direction of that. Secondarily, I’m looking at some of my own tools, like cap-weighted volume, to determine the health of the broad market. From there, I might break it down further using more of my own proprietary work with advance/declines and the health of the liquidity of the market.

Then once I have a good grasp of where I believe the market is headed, then I’ll start looking at what sectors of the market are most attractive, using some of the same techniques, except not with the broad market, but with individual sectors, like through ETFs.

Zack: When actually pull the trigger, are you pulling the trigger on an ETF, or do you go further down to the individual security level?

Buff: I manage several portfolios. I do manage three portfolios that are ETF-driven. One is just an ETF portfolio that’s more of a sector rotation model.

Two, I’ll then flip back to, “Where are my views of the broad market?” If my broad market sense is bullish, then I’ll be fully invested. But on that second portfolio, if my convictions aren’t so bullish, I can then raise cash and trim out some of those exposures in those equity sectors.

The third portfolio is very similar to that, except that cash that I have raised I can use to apply inverse ETFs, which may also not be just the broad market, but may be individual sectors that look bearish.

For instance, right now, I have a portfolio that is mostly invested in the ETF model. I have another portfolio that has quite a bit of cash, and another portfolio that is long ETFs I like, and short the sectors that I don’t like.

Zack: Can you talk about performance, or is that a no-no?

Buff: I really can’t talk too much about performance, because of my firm. But I can say that it has shown positive risk-adjusted rates of return.

Zack: Can we drill down now into the meat of the book? Even as you approached introducing why volume is so important, I think that would be interesting to understand.

Buff: Volume is an essential piece of information. It’s important in two critical ways, because volume can indicate a price change before it happens, and it can help an analyst interpret the meaning of price while it happens.

If you go back to, “What is price,” a trade consists of two things happening. One is, you get price, and two, you get volume. That’s the only information that you get from a trade. Price could be thought of as the agreement to disagree. Two people with opposite opinions about the direction of a security come together in that agreement, and that agreement they form is the price, which appears on the tape. Volume, on the other hand, is how many shares that were consummated at that particular point in time. It’s much less studied and thus represents some very fertile ground.

Benjamin Graham, the founder of value investing, often referred to the market as a voting machine. If the market truly is a voting machine, then volume has to be that ballot box. It’s a literal illustration of the power of supply and demand, or bids and offers. It’s that fuel that powers the market direction.

Zack: So when pundits in the media say, “The market was up 100 points,” whatever it is, a percentage, “but on very light volume,” how do you start to interpret that type of information?

Buff: Volume analysis is complex, but I’m going to give you typically how that would be interpreted. You have to first of all look at the overall context of what’s happening. I see market volume is low on certain price moves, high on other types of price moves, but you have to look at that relatively. Volume is effective in two specific ways. One is what we just spoke about, relativeness: how volume relates to where volume has been recently; and two, its relativeness to price movements. Now with that in general, if there’s low volume, you would say that there’s less conviction in whatever that price movement was.

Zack: If the market went up on low volume, that’s a low conviction move to the upside, and you may say that either we may be reversing, or what? It just lacks conviction? It’s just not a real good tell?

Buff: It lacks conviction. In order for a trend to develop, or be sustained, you need more and more people coming in and being willing to participate at ever-increasing prices. If the market continues to move up, and fewer and fewer investors are willing to participate at ever-increasing prices, it’s a warning that that trend could be on its last legs and is about to end.

Zack: It’s almost like the price movement just tells you what happened, and volume is the explanatory variable. It explains why that happened.

Buff: I would say so. I think volume is used to interpret price.

Zack: Let’s talk about some of the current indicators that people use to measure volume, and how you’ve developed your own indicators that are better mousetraps based on those existing ideas?

Buff: Sure.

Zack: What are some of the accepted wisdom, some of the metrics that people use to measure volume?

Buff: I would say first and foremost, most people just look at raw volume data, which is fantastic information on individual securities because it accomplishes what we’re looking to do, and that’s measure its relationship to price. There’s a lot of volume indicators that go a little further than that and break that down into more detailed information, particularly that second variable which I spoke of earlier, of it’s relationship to price movements.

I would say just looking at the volume bar at the very bottom of the screen is where you want to start. It provides excellent information, particularly on a historical chart where you can compare volume relative to what it’s been in the past.

Zack: At Tradestreaming, we’re also all about trying to find the best tools to do stuff like this. Is there a particular charting site that you use, or you’d recommend as a good source of information for people to use?

Buff: I use several different charting platforms. The one that can be used in accordance with my book, “Investing with Volume Analysis,” is Worden’s StockFinder. Many people that use Worden are into TC2000, but they also have another companion program called StockFinder, and that’s where I have much of my proprietary indicators programmed.

We talked about volume being very useful in individual security analysis, but when you look at volume in analyzing the broad markets, that information is not as valid. Matter of fact, I haven’t used traditional, standard data when evaluating the broad market in well over a decade plus.

Zack: Why is that?

Buff: Well, again, if you go back, what are you looking at when you look at, say, the S&P 500? Then you look below that, and you see volume. And volume, again, is about relativeness and its relationship. So first of all, if we look at that relationship, the S&P 500 is the price, but when you look below there and you see those volume bars, those volume bars are not the volume of the S&P 500. Those are either the volume of the New York Stock Exchange, or the NASDAQ, or a combination of the New York Stock Exchange and the NASDAQ, and maybe even the regionals. It depends on your data feed what actual volume they’re showing you. But it’s not the volume of the S&P 500. So there’s a disconnect in its relationship to the S&P, because they’re not the same indexes.

The second problem with it, and this is even more profound, is that when you look at the S&P 500 volume – let’s just say it’s the New York Stock Exchange volume – there’s a significant difference in the way those indexes are comprised, because the S&P of course is a composite weighted by typically capitalization. So when you look at the S&P 500, each security in that has a specific weight to form the price of that index. Volume, on the other hand, is computed through tallies, and thus the volume information you’re seeing is a grand total of all the shares that were traded, say, within the New York Stock Exchange. That means that the price relationship is not proportional to the volume data.

If I could give you an example of this, nowhere has this been more obvious than the effects of the credit crisis. Some are coining this ‘the blue chip to cow chip phenomenon’, because formerly large cap companies like Fannie Mae, Freddie Mac, Bank of America, AIG, Citigroup, these stocks had huge cap-weighted influences on the price movement of the market, the S&P. Now, these same stocks trade at a small fraction of their pre-credit crisis levels, and thus have very little impact on the movements of the S&P 500 price index because they lost some 90% of their value, so their cap weighting dropped. On the other hand, the volume that these shares now trade has soared, in many cases, 500% or more. When you look at the volume, like say for Citigroup before it had that reverse split, it was having a huge impact on the market. Even now that it’s split, it still does. It has a very significant impact on the S&P volume, but it has a very small fraction in its weighting to the S&P 500 index.

Take a big stock, Exxon. Exxon represents almost 3% of the S&P 500’s price index, but only trades less than half a percent of the volume when you look at the New York Stock Exchange volume beneath. So it has a huge weighting in price, but has a negligible effect on the volume. Take for example another one, this is even worse, Apple. Apple now is the biggest component, and it doesn’t have any volume in there because it’s not a part of the NYSE. So for that reason, I do not use the volume data that’s typically supplied either through software or even though publications, because there’s a disconnect.

Zack: What do you use, then?

Buff: I use the cap-weighted volume. That’s my own proprietary formula that corrects the problem. What cap-weighted volume does is it computes volume the same way that the S&P 500 computes the price index. Each security has a weighting. Let’s say Exxon is 3% of the S&P 500, its volume would represent 3% of the S&P 500. So each security, just like the price index, is weighted as well for volume. This harmonizes the volume of each security with each security’s price movement.

Zack: Can you walk me through it? I know it’s hard to do in just a few minutes, but talk about a successful deploy of your theories? I’m not talking from a performance point of view. What would it take for you to pull the trigger on a specific security? Can you walk me through that checklist? You talked about the broad market. Say the broad market checks out; things look good today. Now, as you move down towards the sector and security level, what would it take? What kind of readings are you looking for to get you to get interested in that security?

Buff: Let me give you a couple of scenarios. One is I had an article out in MarketWatch that talked about, in April, about the market setting up very much similarly to what it did in 2008. We were looking at a replay of 2008 way back in April, and the reason being because much of the volume data that happened in 2008 with its relationship to the price movements, was very similar in March of this year and January of 2008. Some of those same setups were occurring, and that made us very cautious. But also there was a signal that happened in January of 2008 that occurred again in March of this year that was a short-term bullish signal. So back in that article, I talked about the market having a short-term rally, and then a crash, similar to the events of 2008. The reason we were able to look at that is because of the information that volume had in relationship to price.

The bullish signal, the reason that we thought that the market would rally from the bottoms that we had earlier in March, was that the market was capitulating. What happens is when the market capitulates, the stock market drops and the volume increases. A capitulation signal in volume is not the same as a capitulation signal in price. What we’re looking for is for the market to continue to move down, volume to expand, but then as the market moves down even deeper, the volume levels off. Even though it may be rising a little bit, relatively to how much the price is dropping, it’s dropping less. Volume is dropping less than price is dropping. When you see that occur, it’s a capitulation signal that the market is about to turn. So we had a good buy signal in March that told us that the market could go. I thought it would go to 1380; it only went to 1360. That was in comparison of what happened very similarly in 2008 when it did go to 1380.

The second part of that is how do you pick individual stocks? What I look for is stocks that have strong relative strength on the price movement. That means that the market in those individual stocks is trending higher. Again, if that trend is sustained, you need more and more volume to be coming in. So I’m looking to take and break down that volume data through manipulation and looking at that and making sure that that volume is accelerating and has relative price momentum. Those are the cues that I look for. If I see a stock that is breaking out on high volume, those are the types of issues that really get my attention.

Zack: Can you use some of the technical terms that you used in the book to go over that same process you described? You don’t have to go over the process again, but you’ve really bettered some of the indicators, some of the tools that people are using. I just wanted to hear from you the language that you use.

Buff: There’s a variety of different indicators that I have in the book. One of the ones that I just spoke about was finding a capitulation bottom. That is, I use the Volume Price Confirmation Indicator, which is an indicator of mine that I used to write a paper that won the 2007 Charles Dow Award. The VPCI looks at the intrinsic relationship between a price trend and its corresponding volume. Most indicators look at a price entered at one period of time and a volume at the same period of time. What I’m looking at here with the VPCI is a price trend over a course of time, and that volume trend over the same course of time.

If those two are working together in harmony, then we can believe that trend is being confirmed by the volume. However, if the price trend is moving one way and volume the other, we can then assume that the price is not being confirmed, but it’s actually being contradicted by the volume, and that trend could thereby, in time, collapse.

Zack: I feel like we could talk for hours about some of this stuff. Unfortunately, our time doesn’t allow for it. Where would people go to learn more about your theories? You mentioned your website. Can you give that website again?

Buff: My book is ‘Investing with Volume Analysis’, and there you’ll find a great resource for a variety of volume tools as well as volume theory, and how to use volume in your investing.

Zack: How do you use your website? Is that just a marketing place for the book? Is there a newsletter, or something?

Buff: At this point, if you sign up and go to Worden StockFinder, you can have an add-on so that you can use many of my indicators that are discussed in the book. I also put updates on what’s happening with volume, and some other stories that other people are talking about that are relative to volume analysis in the marketplace.

Zack: I just want to get that straight. So the Worden StockFinder, you actually have built tools that plug into their software that actually has some of your analysis in it?

Buff: Absolutely.

Zack: Great, that’s interesting. One question that I ask all of our guests on the show, where do you go to better yourself? Where are you going for research, resources that you come back to again and again that you find useful either for gauging markets or other indicators, or some of the best thought leadership in the technical analysis industry? Are there certain things that you could note?

Buff: I’ve read a lot of different books, and attended seminars. With the market, it’s always moving and changing, and it’s a challenge to keep up on the latest things that are happening. My best advice for people that are looking to learn is to just talk with other people. Develop a relationship with a mentor that you respect, and get their thoughts. I think that’s absolutely the best way to learn is to have a mentor. And two, do things like I’m doing now: talk to people. When you’re talking to others, it keeps you sharp. Do what you do, and seek out people that know more than you, and try to learn from them.

Zack: Is there a lot of mentorship going on in the technical analysis community? Is there an established relationship like that? Coaches, or something like that?

Buff: There’s a lot of different websites that try to sell coaching on technical analysis, and I wouldn’t recommend any of those. The best place to go is the Market Technicians Association. There you have a community of people that are using technical analysis professionally. It’s very easy, if you work at it, to be able to establish some relationships through that organization.

Zack: That’s great. Hey, Buff, thank you so much. Again, I wish we had an hour. Maybe we can invite you back on to do a longer session in the future, but this is very useful. For me, I learned a lot about not just about technical analysis in general, but how to apply this whole volume piece to it. Hopefully I’ll incorporate that in my investing in the future. Thanks again for joining us.

Buff: Thanks for having me, Zack, and we’ll look forward to speaking to you again.


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