Sunday, July 31, 2005 10:24:21 PM
David's Sunday Market Chartmentary 7/31/05
The Market According to Volume
Gauging the “Oversold” and “Overbought” conditions by following an absolute set of numbers or readings is “Over-simplifying” what technical analysis is all about. Quite often, these readings were arbitrarily imposed by someone other than the creator of the indicator. Technical analysis should be about the study of relativity – the relative movements of price and volume. When the market remains “oversold” or “overbought” for a long time, it’s just the market’s way of telling us to take our arbitrary readings and shove it. And, in frustration, we denounce the usefulness of the technical indicator.
I, too, was indoctrinated into believing that the market “should” follow our pre-set mandatory readings. Of course, I had been wrong. One of my fond studies is the trading volume, and I can’t think of anyone who thinks and talks about the trading volume more than Richard W. Arms, Jr., who develops, among other indices, TRIN Index. Incidentally, if you’d read through his book, “Trading with Equivolume”, you’d find absolutely no mentioning of the word Overbought. And, he only used the word Oversold once in reference to a hypothetical market condition. Neither word was used for the purpose of his indicator.
Chart 1 is the 10-minute intraday chart of the big board’s composite index that covers Thursday and Friday’s action. If this chart looks different to you, it’s because it’s an Equivolume Chart with the TRIN Index. The width of the rectangular box is the volume. The top of the box is the high price of the period (10 minutes in this case), and the bottom of the box is the low. Richard Arms sees the “square boxes” as the turning points.
These squares boxes that are wide for their heights represent increased volume and tight price range. According to Richard Arms, after an advance, one or a group of these square Equivolume boxes tell us that there are still buyers trying to push the price higher, but they’re encountering sellers who are willing to give them all the shares they want at a given price. It’s usually a clear sign of the reversal of the current trend, and a warning that prices are likely to head lower.
CHART 1
On Thursday, a group of these square Equivolume boxes was formed as the NYSE Composite Index crossed above the 7500 – see blue circle at numeral 1. At the same time, the TRIN Index (lower pane) also reversed its uptrend and started declining. It eventually dropped below 1 (purple line). Indices which are under 1 are usually bullish because the stocks that are going up are getting more than their fare share of the volume. However, if it’s in a clear declining trend, then that could also mean that the advance issues were declining while the buying volume continues to pour in for these issues. This is a sign of the market breadth deterioration. We’ll take a look at the 1999 market top as an example when we get to the “big” picture chart. For now, this rapidly declining TRIN on Thursday confirmed the formation of the group of square Equivolume boxes as a warning that prices are likely to head lower.
Towards the end of Thursday’s session, another square box was formed (numeral 2) after the NYSE index reached its high. The TRIN Index meanwhile reversed its downtrend and started climbing. This rising TRIN Index indicated that the up volume for the advancing issues began to decline, which in turn meant that the buyers were leaving the market.
By the way, this Equivolume chart was one of the reasons that gave me that growing uneasy feeling, which prompted me to present the “Before” and “After” the London bombing pictures (charts) on Thursday, after the closing. In any regard, I think I've written enough about this baffling market behavior since the week of the terrorists bombing, so let's move on.
You may also notice that, along the red downtrend trendlines, there are “power” Equivolume Boxes that are long and wide. These show the ease of movement for the downtrend on Friday. Some buyers did come in and tried to stop the fall a couple of times (numeral 3 and 4) by forming some square boxes, but the selling eventually sliced right through them like a hot knife. And there’s no other square boxes in sight within the final hour of trading. So, in the short term the selling should continue. This seemed to be supported by a couple of my short-term observations.
In Richard Arms volume analysis, he disregards the unchanged issues and the unchanged volume due to their insignificant sizes. And, I don’t believe anyone else has paid any attention to them either. Usually, the unchanged issues average about 150, and the unchanged volume averages about 1.5% of the total trading volume. They really mean very little staying static. But any sudden movement could provide subtle indication of imminent change of the market directions.
For examples, the unchanged volume increased to almost 3% (100% increases) of the total trading volume on 7/6/2005, the day before the London bombing. And, on Tuesday, 7/26/2005 and Wednesday, 7/27/2005, the unchanged volumes were 3.52% and 3.61% respectively. The unchanged volume on these 3 occasions shot up 100% to 140% overnight. These unusual movements really caught my attention. We’ll cover more of this in the future. For now, let’s take a look at the TRIN Index in the “big” picture context.
On this multi-year chart, it should be noticeable that the TRIN Index stayed mostly under 1 (black horizontal line) while the bull market was in full force through most part of 1999. It then hit the trough in November 1999 before the TRIN Index started trending higher. And, that November 1999 TRIN bottom occurred at approximately the same time the market topped out. This TRIN bottom serves as a good example of how the volume had gone way ahead of the market. What then ensued was a period of price corrections.
After the uptrend from 1999 through the beginning of 2003, the TRIN Index then started moving sideways. It’s in consolidation, but it continues to stay mostly above 1, which is deemed bearish. This means that stocks that are going up are not getting their fare share of the volume. That indicates weaknesses in the market internals. As long as the TRIN Index stays above 1, the market participants should continue to trade with a bearish bias, which means trading with extreme caution.
The TRIN Index will not move below 1 and stay there unless either the excess in the current stock prices is corrected or an exponential amount of buying suddenly rushes into the market. We know which one is the likely scenario unless the Fed gone wild.
CHART 2
The Market According to Volume
Gauging the “Oversold” and “Overbought” conditions by following an absolute set of numbers or readings is “Over-simplifying” what technical analysis is all about. Quite often, these readings were arbitrarily imposed by someone other than the creator of the indicator. Technical analysis should be about the study of relativity – the relative movements of price and volume. When the market remains “oversold” or “overbought” for a long time, it’s just the market’s way of telling us to take our arbitrary readings and shove it. And, in frustration, we denounce the usefulness of the technical indicator.
I, too, was indoctrinated into believing that the market “should” follow our pre-set mandatory readings. Of course, I had been wrong. One of my fond studies is the trading volume, and I can’t think of anyone who thinks and talks about the trading volume more than Richard W. Arms, Jr., who develops, among other indices, TRIN Index. Incidentally, if you’d read through his book, “Trading with Equivolume”, you’d find absolutely no mentioning of the word Overbought. And, he only used the word Oversold once in reference to a hypothetical market condition. Neither word was used for the purpose of his indicator.
Chart 1 is the 10-minute intraday chart of the big board’s composite index that covers Thursday and Friday’s action. If this chart looks different to you, it’s because it’s an Equivolume Chart with the TRIN Index. The width of the rectangular box is the volume. The top of the box is the high price of the period (10 minutes in this case), and the bottom of the box is the low. Richard Arms sees the “square boxes” as the turning points.
These squares boxes that are wide for their heights represent increased volume and tight price range. According to Richard Arms, after an advance, one or a group of these square Equivolume boxes tell us that there are still buyers trying to push the price higher, but they’re encountering sellers who are willing to give them all the shares they want at a given price. It’s usually a clear sign of the reversal of the current trend, and a warning that prices are likely to head lower.
CHART 1
On Thursday, a group of these square Equivolume boxes was formed as the NYSE Composite Index crossed above the 7500 – see blue circle at numeral 1. At the same time, the TRIN Index (lower pane) also reversed its uptrend and started declining. It eventually dropped below 1 (purple line). Indices which are under 1 are usually bullish because the stocks that are going up are getting more than their fare share of the volume. However, if it’s in a clear declining trend, then that could also mean that the advance issues were declining while the buying volume continues to pour in for these issues. This is a sign of the market breadth deterioration. We’ll take a look at the 1999 market top as an example when we get to the “big” picture chart. For now, this rapidly declining TRIN on Thursday confirmed the formation of the group of square Equivolume boxes as a warning that prices are likely to head lower.
Towards the end of Thursday’s session, another square box was formed (numeral 2) after the NYSE index reached its high. The TRIN Index meanwhile reversed its downtrend and started climbing. This rising TRIN Index indicated that the up volume for the advancing issues began to decline, which in turn meant that the buyers were leaving the market.
By the way, this Equivolume chart was one of the reasons that gave me that growing uneasy feeling, which prompted me to present the “Before” and “After” the London bombing pictures (charts) on Thursday, after the closing. In any regard, I think I've written enough about this baffling market behavior since the week of the terrorists bombing, so let's move on.
You may also notice that, along the red downtrend trendlines, there are “power” Equivolume Boxes that are long and wide. These show the ease of movement for the downtrend on Friday. Some buyers did come in and tried to stop the fall a couple of times (numeral 3 and 4) by forming some square boxes, but the selling eventually sliced right through them like a hot knife. And there’s no other square boxes in sight within the final hour of trading. So, in the short term the selling should continue. This seemed to be supported by a couple of my short-term observations.
In Richard Arms volume analysis, he disregards the unchanged issues and the unchanged volume due to their insignificant sizes. And, I don’t believe anyone else has paid any attention to them either. Usually, the unchanged issues average about 150, and the unchanged volume averages about 1.5% of the total trading volume. They really mean very little staying static. But any sudden movement could provide subtle indication of imminent change of the market directions.
For examples, the unchanged volume increased to almost 3% (100% increases) of the total trading volume on 7/6/2005, the day before the London bombing. And, on Tuesday, 7/26/2005 and Wednesday, 7/27/2005, the unchanged volumes were 3.52% and 3.61% respectively. The unchanged volume on these 3 occasions shot up 100% to 140% overnight. These unusual movements really caught my attention. We’ll cover more of this in the future. For now, let’s take a look at the TRIN Index in the “big” picture context.
On this multi-year chart, it should be noticeable that the TRIN Index stayed mostly under 1 (black horizontal line) while the bull market was in full force through most part of 1999. It then hit the trough in November 1999 before the TRIN Index started trending higher. And, that November 1999 TRIN bottom occurred at approximately the same time the market topped out. This TRIN bottom serves as a good example of how the volume had gone way ahead of the market. What then ensued was a period of price corrections.
After the uptrend from 1999 through the beginning of 2003, the TRIN Index then started moving sideways. It’s in consolidation, but it continues to stay mostly above 1, which is deemed bearish. This means that stocks that are going up are not getting their fare share of the volume. That indicates weaknesses in the market internals. As long as the TRIN Index stays above 1, the market participants should continue to trade with a bearish bias, which means trading with extreme caution.
The TRIN Index will not move below 1 and stay there unless either the excess in the current stock prices is corrected or an exponential amount of buying suddenly rushes into the market. We know which one is the likely scenario unless the Fed gone wild.
CHART 2
David
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