Is the shrinking volume and stepping back on the 20-day moving average a healthy adjustment or a weakening trend?

A pullback to the 20-DMA with shrinking volume may signal a healthy correction, not a trend reversal, especially if price holds support and upward momentum resumes.

Jul 31, 2025 at 10:30 am

Understanding Volume and the 20-Day Moving Average in Cryptocurrency Markets

In cryptocurrency trading, volume and moving averages are two of the most closely watched technical indicators. Volume reflects the total number of assets traded over a specific period, providing insight into market participation and conviction behind price movements. A high volume typically confirms the strength of a trend, while low volume may suggest indecision or weakening momentum. The 20-day moving average (20-DMA) is a short-term trend indicator that smooths out price data over the past 20 trading days, helping traders identify the current market direction.

When price action steps back to touch or retest the 20-day moving average, it can signal a pullback within an established trend. This behavior is common in healthy markets where consolidation follows strong moves. However, if the pullback is accompanied by shrinking volume, it raises questions about the sustainability of the prior trend. Shrinking volume during a price retreat may indicate that selling pressure is not intense, which could support the idea of a healthy correction. Conversely, if volume remains elevated during the pullback, it might point to distribution or active selling.

Interpreting Shrinking Volume During a Pullback

A decrease in trading volume during a price correction often suggests that the market is pausing rather than reversing. In this context, shrinking volume while price retests the 20-day moving average may reflect a lack of aggressive selling. This scenario is typically observed when traders are holding positions and not rushing to exit, which can be a sign of underlying strength.

• Market participants may be using the dip to accumulate at better prices
• Short-term traders might be taking profits, but long-term holders are not capitulating
• Institutional activity may be subdued, leading to lower overall volume

When volume contracts during a pullback, it often precedes a resumption of the prior trend, especially if the 20-DMA continues to slope upward. However, traders should not assume this outcome automatically. The key is to observe whether price holds above the moving average and whether volume expands on the next upward move. A breakout with increasing volume would reinforce the idea of trend continuation.

Assessing the Role of the 20-Day Moving Average as Support

The 20-day moving average is widely used as a dynamic support level in uptrends. When price pulls back and finds support at this level, it can reaffirm bullish sentiment. For this support to be considered valid, certain conditions should be met:

• Price should touch or slightly pierce the 20-DMA without closing significantly below it
• The candlestick pattern near the moving average should show rejection of lower prices, such as long wicks or bullish engulfing patterns
• Volume should remain low or decline during the approach to the moving average

If price closes decisively below the 20-day moving average on high volume, it may signal a shift in momentum. This could indicate that the short-term trend is losing strength and that bears are gaining control. Traders often use this as a signal to reassess their positions, especially if other indicators, such as the Relative Strength Index (RSI) or MACD, also show bearish divergence.

How to Monitor for Confirmation of Trend Health

To determine whether the current price action represents a healthy adjustment or a weakening trend, traders should monitor multiple data points simultaneously. Relying solely on volume or the 20-DMA can lead to misinterpretation. Instead, a confluence of signals should be evaluated.

• Watch for volume expansion on upward moves following the pullback — this confirms renewed buying interest
• Check whether the 20-DMA remains sloping upward — a flattening or downward turn suggests weakening momentum
• Examine higher timeframes, such as the daily or weekly chart, to assess the broader trend context
• Use oscillators like RSI to detect overbought or oversold conditions near the moving average

For example, if RSI drops below 50 but remains above 30 during the pullback and then turns upward, it may indicate a temporary pause rather than a reversal. Similarly, if MACD lines converge near the signal line but do not cross bearishly, the uptrend may still be intact.

Practical Steps to Analyze the Current Market Structure

To conduct a thorough technical assessment of whether the market is undergoing a healthy adjustment or a weakening trend, follow these steps:

• Open a candlestick chart of the cryptocurrency in question and apply the 20-day moving average
• Adjust the volume indicator to appear beneath the price chart and observe volume bars during the recent price decline
• Identify whether price has closed below the 20-DMA on any daily candles — a single close below may not be significant, but multiple closes are concerning
• Look for candlestick patterns near the moving average, such as hammers or bullish engulfing formations
• Compare current volume levels to the average volume over the past 20 days — a drop of 30% or more indicates shrinking participation
• Overlay the RSI (14-period) and check for divergence — if price makes a lower low but RSI makes a higher low, it suggests hidden bullish strength

Traders can also use Bollinger Bands to assess volatility contraction during the pullback. Narrowing bands often precede a breakout, and if price remains within the upper half of the bands, the bias may still be bullish.

Frequently Asked Questions

Can a healthy correction occur without retesting the 20-day moving average?

Yes, a healthy correction can take the form of sideways consolidation above the 20-DMA rather than a direct retest. As long as price holds above key support and volume remains low, the trend may still be intact.

What does it mean if volume increases while price retests the 20-DMA?

An increase in volume during a retest can indicate strong interest at that level. If the price bounces with high volume, it suggests strong demand. However, if price breaks below on high volume, it signals distribution and potential trend reversal.

How long should a pullback to the 20-DMA typically last?

There is no fixed duration, but most healthy pullbacks resolve within 3 to 7 candlesticks on the daily chart. Prolonged consolidation below the 20-day moving average increases the risk of a bearish breakdown.

Is the 20-day moving average more reliable in certain cryptocurrencies?

The 20-DMA tends to work better in highly liquid and actively traded cryptocurrencies like Bitcoin and Ethereum, where price action is less prone to manipulation. In low-cap altcoins, whipsaws and false breakouts are more common, reducing the reliability of the indicator.