Volume and Open Interest

Murphy sets out four golden rules of volume and trend: (1) in a healthy uptrend, volume expands on advances and contracts on corrections — buyers are more aggressive than sellers; (2) the reverse in a downtrend; (3) an upside breakout without volume expansion is suspect — and the requirement is asymmetric: Murphy notes that a market can fall of its own weight on light volume, whereas an upside break demands volume confirmation; (4) an extreme volume spike often marks a point of exhaustion

The volume/price divergence is the most reliable signal volume produces. If price makes a new high while volume is below the previous peak's, the advance is fading. Murphy considers this signal more reliable than oscillator divergences, because volume measures participation directly

The OBV, created by Joe Granville, is in Murphy's view the simplest and most widespread volume indicator — and he immediately notes its limitation: the entire session's volume is assigned to one side according to the sign of the close, which is why finer variants weight volume by the size of the move. Its direction should confirm price. If price rises while the OBV stalls or falls, a reversal is likely

On futures markets Murphy recommends combining volume with open interest, and derives four price/OI combinations. Price up + OI up = a healthy uptrend (new money entering on the buy side); price down + OI up = a confirmed downtrend (new sellers committing). The two intermediate cases are the most instructive: price up + OI down = short covering — a technically weak advance, fuelled by short sellers buying back with no new money, a classic warning; price down + OI down = liquidation of long positions, the decline exhausting itself for want of new sellers. Expanding volume strengthens each of these readings