Recently, while chatting with friends, I found that many people actually don't understand why stocks keep rising while trading volume is getting smaller and smaller. This phenomenon is called price-volume divergence, and today I want to talk about what this actually means.

In fact, the most deceptive movements in the stock market are those that look "normal" but secretly hide risks. You might say that stock prices hitting new highs is a good thing, but if trading volume is shrinking, you should be cautious. Conversely, if stock prices are falling but trading volume suddenly spikes, that's also not a good sign.

To understand these phenomena, you first need to clarify what the relationship between volume and price is. Simply put, there is a correlation between a stock's price and trading volume; the size of the volume behind price movements reflects market participants' confidence in the trend. Observing how volume and price coordinate can help us judge where the stock price is headed next, which is a very important aspect of technical analysis.

I’ve summarized eight common volume-price relationship patterns. The first is increasing volume with rising price, which usually appears at the early or middle stages of an uptrend, indicating capital inflow and bullish momentum, making it a good buy signal. The opposite is decreasing volume with falling price, where the stock price declines but trading volume diminishes, indicating no one is willing to take over, and the downtrend has not fully ended.

Next are two extreme cases: "heavenly volume, heavenly price" and "earthly volume, earthly price." Heavenly volume and price typically occur at relatively high levels, with the stock reaching new highs accompanied by record-breaking volume, often signaling that major players are offloading shares to retail investors, and bullish strength has been exhausted. Earthly volume and price happen at long-term bottoms, with trading volume shrinking to the lowest point, showing extremely low market participation, which can be an opportunity for medium- to long-term positioning.

Then there's the situation of increasing volume with flat price. This can occur in two scenarios. If it happens at the bottom, with little price movement but increasing volume, it usually indicates that major players are quietly accumulating. If it occurs at a high level, with the price unable to rise further but volume surging, it’s often a sign that major players are offloading shares to create a false appearance. The last pattern is flat volume with flat price, meaning bulls and bears are evenly matched, and everyone is waiting. In this case, the trend is unclear, and it’s better to observe more than to act.

Now, the key point—price-volume divergence. This refers to the situation where price and volume move in opposite directions, giving contradictory signals. This often indicates that market momentum is weakening or that the current trend is just an illusion, serving as an important warning of a potential reversal.

Price-volume divergence mainly occurs in two forms. One is increasing volume with falling price. If this happens at the start of a decline, it indicates panic selling, with investors rushing to exit regardless of cost. This suggests the downtrend is just beginning, and it’s not a good time to buy. However, if it appears at the end of a decline, with the price having already fallen significantly and volume suddenly surging, it indicates the last group of sellers is capitulating, often interpreted as the final dip before a reversal or bottom.

The other form is decreasing volume with rising price, especially at the end of an uptrend. If the stock price is still making new highs but volume is decreasing with each new high, forming a clear price-volume divergence, it means that although the price is holding up, there are very few buyers willing to chase the price. This situation often appears at market peaks and warrants attention for potential reversals.

What if price-volume divergence occurs during a decline? If the stock rebounds but volume doesn’t follow, showing a rebound on low volume, it indicates weak buying interest. This is just a temporary relief rally caused by reduced selling pressure, not genuine buying. Such rebounds are often "escape waves," and after they end, the decline usually continues.

My experience is that many confusing market movements can be traced back to clues in the interaction between volume and price. Volume reflects the momentum behind price movements, and price shows the market’s response. When both move in the same direction, the trend is usually more reliable; but when they diverge, you should be more alert.

Of course, volume-price relationships cannot predict the future with 100% certainty, but they are useful tools to interpret the market and improve your odds. For example, the same increase in volume with a falling price can mean different things depending on whether it occurs at the start or end of a decline. The key is whether you can judge where the stock currently stands. Next time you analyze the market, take a few seconds to observe changes in volume. Once you get used to viewing volume and price together, you'll be closer to understanding the true state of the market than most investors who only watch price movements.