What is exhaustion volume?

By Thomas Wong II, Real Life Trading Mentor

Being a new dad has taught me about exhaustion. I remember not too long ago feeling like I kept exerting energy to keep going and going while my baby seemed to be content sleeping for about 30 minutes at a time until eventually my wife found me knocked out on the floor while laying next to our new baby. (Sound familiar to any other parents out there?) Well this scenario “happens” in the markets too and it is often signaling a turning point in the current trend. This is often called exhaustion volume.

The goal of this article is to help you spot, feel, and recognize exhaustion volume on a chart. In this article I will assume you already understand the basics of reading a chart such as what candlesticks are (see the beginning of this video if you want a refresher on how to read candlesticks: https://youtu.be/uy_TxbF9nCA?t=57). Exhaustion volume is usually marked by larger than normal volume on a chart and typically occurs after a large move has already occurred either up or down. There are often wicks at the end of the candlestick also showing that price action had moved in the direction of the trend, but had started to reverse and closed after moving in the opposite direction. Exhaustion volume usually signals a change in the trend either into a complete trend reversal, or into an accumulation or distribution phase (see this video here if you want a review of the different phases of the market: https://youtu.be/3OjhoStCA2k?t=1342). See chart of TRLY below for an easy example.

In the chart above we can see the white arrows pointing to a massive candle with a large upper shadow (wick) that reached a high of $300 after opening around $235 and the largest amount of volume on this stock up to this point. TRLY had just made a move from around its IPO level of about $23 to $300. It had made a massive move already. People then started to take profits and it sank to a low of about $150 during that day’s trading session only to close around $215. This would normally just describe an indecision doji however because of the move that it had already made and because of the spike in volume, this qualifies as exhaustion volume.

Let’s think about why. Imagine you were hiking up a hill for a few hours non-stop and the hill had gradually become steeper and steeper. You can feel the muscles pulling in your leg, but you can see the top; just a few steps more. You muster up your strength to take the last step to the peak and you feel the burst of elation and flat ground. Imagine yourself at this point. Tired? Muscles aching? What are you more likely to do at this point? Take a breather and savor your accomplishment? Or are you more likely to start a race against a fresh runner who has been waiting for you to exhaust yourself? In the case of TRLY everyone that had a bullish bias had been pushing up the stock day after day without much of a rest and they finally had one last push. Only to find out that a majority of the people had decided that they had made enough profit and they started selling. On top of that there were probably people who were waiting to for the right moment to short the stock and they started driving the price down too. Can you feel the sentiment? That volume spike is like the last ounce of energy in your legs propelling yourself to the top.

Now that we have covered what exhaustion volume is and hopefully have a picture in your mind of how it looks and feels, we will focus on some more examples. In this next example we can see that exhaustion volume doesn’t always mean the trend reverses permanently.

This is a chart of BYND and the first set of white arrows point to an initial exhaustion volume that really only lasted a few days (although peak to trough that full downward move was a 32% decline). But after that happened the price moved higher, more cautiously, as shown by some of the declining volume that ultimately peaked again with exhaustion volume (the second set of white arrows).

Here is yet another BYND chart although to the downside this time where after that previous exhaustion volume to the upside around $240, price has plummeted all the way down to about $80 after that earnings report in the middle of the chart. That move down did end up going a bit lower, but notice how price action has started to level out (accumulation phase). This actually led to a sudden breakout in price with more than a 70% increase in just days where it again ended with exhaustion volume trading into old support, new resistance (purple line).

One more example for good measure, this following chart is of NKE. In this chart you can see that large upper shadow and the increased volume at its then all time high. That candle set the tone for the next 6 months of price action! Every time NKE traded up into that range over the next 6 months, it sold off until it had enough time distributing and had enough time to catch its breath to get ready for the next move with that gap on the right of the screen.

Hopefully these last few examples have given you more ideas about how this plays out in real life. Just because there seems to be exhaustion volume doesn’t mean you know 100% for sure what will happen next, but you can certainly form a plan to execute based off of it. If you felt like this article was helpful please leave a comment and don’t forget you can sign up for a free account with Real Life Trading where you can engage in our other content!

Thomas Wong II is a trader, personal finance coach, and mentor with Real Life Trading. He is also an investor and specializes in trading equities and options. He can be reached at thomas@RealLifeTrading.com and you can book a one on one coaching session with him here: https://www.reallifetrading.com/personal-coaching