<< So a volume spike as you approach resistance is usually good reason for a short? >>
Not necessarily---it is a good time to consider at least partially liquidating a long position, tightening up the stop, or taking a short position.
I have a few general rules (I didn't make them up, of course...):
1. Consider long positions in stocks that are in uptrends.
2. Consider short positions in stocks that are in downtrends.
3. Enter new long positions when they have corrected back to support and are oversold.
4. Enter new short positions when they have rallied into resistance and are overbought.
(You can see these 4 rules can be distilled into two more general rules)
So the first order of business is to figure out what kind of trend the stock is in, particularly what trend relative to the time frame you are trading in. So, you might short a stock that is in a long-term uptrend, yet simultaneously in a medium-term or short-term downtrend. This is what we have been doing with QQQQ---it is in a long-term uptrend, medium term downtrend, and as of today, short-term uptrend.
I don't mean to beat around the bush, and I am sorry if it seems that way. In general, your implication is correct: increasing volume as a stock is rallying is a sign of professional profit taking and/or professionals taking up short positions; the more marked the pattern, the more reliable the significance. Conversely, volume surges as a stock is trading down do not signify increasing selling pressure, they signify increasing buying pressure, so a long position should be considered.
So the more prominent the volume spike as a stock rallies, the more you should be considering selling a long position and/or flipping to a short position. But as with all indicators, volume patterns must be interpreted within the general context of the stock and market. I know of no indicator that can be used reliably by itself. And interpretation of volume patterns is complicated by the fact that the stock or index may not immediately respond, but instead may "accumulate" pressure from volume patterns; this is because professional accumulation and distribution usually take place over a fairly long time frame.
Believe it or not, one of the major things I look for when trading very short term things (especially intraday trading) is a strong volume surge on a stock that is selling off hard and fast. If there is a very sharp peak in volume, I get very very interested, and I watch for the following: (1) reversal candle coinciding or very shortly following the highest volume spike; (2) sudden evaporation of volume; and (3) a bullish candle on markedly decreased volume. This constellation constitutes a buy signal IMHO. The opposite is true for sell signals. I also examine volume patterns in longer time frames of course, but I tend to dwell on other things more.
If the stock is in a strong uptrend, I would not usually consider a short in the first place---for example, I wouldn't dream of shorting AAPL or RSTG. That's like playing chicken with a freight train, and what for? There are so many stocks out there like KKD, why mess with a market leader with high relative strength?
Volume and sentiment are two widely neglected but very important determinants of stock price movement, and both can be exploited to help with trades.
But I strongly strongly urge you to not take my word for it. Instead, carefully follow volume patterns on some stock or stocks, or some index. Watch what happens. Come to your own conclusions---that's how I came to the conclusions above, after all. Feel free to take issue with me. Post your thoughts here on this thread, make your observations and interpretations. We'll all learn something that way, and I don't mind one bit if somebody thinks I am wrong. I don't take it personally. Even though I may well argue my case, I try very consciously to remain as open as possible to the chance that I am wrong.
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