Sunday, September 14, 2008

S&P 500

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Over the past week in several my posts ("Support" in particular) I have concentrated my attention on the extremely high volume on the stock market. These high volume surges during the recent decline are seen clearly in all indexes including S&P 500, Nasdaq 100 and DJI. I compared some volume numbers in my "Oversold" post to the historical similar occurrences of high volume surges and pointed to usual stock-market reaction on such volume.

As I already mentioned, in all cases we always saw strong up-trend movement in response to the high volume. I always associate the high volume during the price decline as panic selling which leads market into oversold stage and the extremely high volume as extremely high panic selling which leads the stock market into extremely high oversold stage.

To better explain my view of the volume surge during the decline I set a few points. Yet, before coming to them you have to understand that volume does not show how many buyers or sellers we have, volume is 2-side transaction and for each sold share we have somebody who bought it.

1. Price declines and the volume is low: Price is declining because we have more sellers than buyers and there is not enough buyers on the market to satisfy the demands of these sellers and these sellers are willing to sell at cheaper price in order to find buyers.

2. Price declines and the volume is high (we have volume surge):The panic among sellers is growing as well as greed of the traders playing short and they are pushing the market stronger down. At some moment a group of traders (we may call them smart traders, institutional traders - I call them "Big Money Bags") make a decision to satisfy demands of all sellers by buying the huge amount of shares. At this moment we see high volume surge - a huge number of shares are changing hands.

3. Next: Those who wanted to sell - sold and have nothing to sell any more. Those who have bought, do not want to sell - they just bought and they are not in the losing position, even more, they are willing to buy more at this low price (that is why I call them "Big Money Bags"). So, the market starts to climb up under the buying pressure of the "Big Money Bags".

This is my understanding of the volume surge during the price decline. Why at some point "Big Money Bags" decide to satisfy demands of the panic sellers?, what kind of information do they have? - I do not care. All I know that if some traders with big bags of money decided to satisfy the sellers by buying at cheap price they will have enough money to push stocks higher to dump them at higher price to the greedy buyers later...You may accept my vision, you may decline it. Yet, it's difficult to argue with history. The main concept of technical analysis is to compare the current event to the history and find the possible future trend.

Chart #1: S&P 500

SP 500 chart
Chart #2: S&P 500
 sp500 chart

Summary of the charts:

July 2007 - Strong volume surge during the price decline with recovery after
November 2007 - Strong volume surge during the price decline with recovery after
January 2008 - Strong volume surge during the price decline with recovery after
March 2008 - Strong volume surge during the price decline with recovery after
July 2008 - Strong volume surge during the price decline with recovery after

September 2008 - Strong volume surge during the price decline ... what is next?


Michael said...

The principle of volume surges affecting price in the opposite direction makes sense to me. But I can't figure out how to trade it. Just using the MVO or SBV indicators doesn't seem to work.

Can you give some insights on how to trade using these indicators?


TraderJoe said...

MVO shows how big the volume surge is in relation to the history. I do not think it could be used alone to generate signals. Yet, I believe it is a good indicator to alarm about possible changes. For instance you may set a system to ignore signals generated by other technical indicator until you see big volume surge.

SBV is good, yet, the signal line is not always clear. In some cases it's better to open a trade at 20% signal line in some cases it could be 33% signal line or other. I accept SBV more as directional signal. If I see that SBV starts to decline after being in advance I check other technical indicators such McClellan Oscillator, RSI and Stochaticks to define entry point. You may see my regular set of technical indicator in my previous "Nasdaq 100" post. At the same time I like to monitor several timeframes at the same time

Michael said...

Do you have an idea of what makes the SBV cross the zero line? I think it has something to do with the A/D but I can't nail it down. I'd like to understand how it works better. For example I struggle with finding the right period for a 5 minute chart. 6 matches the tops & bottoms, but 20 gives longer term signals. On 6 it will cross 0 and back but on 20 it will still be on the same side.

Thanks for the blog, I really enjoy it. Hopefully more people will participate.

TraderJoe said...

I have no idea how they calculate SBV, yet it looks like with any other volume based studies the divergence between SBV and price moving average could be used to anticipate trend reversal. I do not use any particular signal level on SBV but rather watch for SBV reversals. I think it would be a good idea if they could apply exponential moving average to SBV oscillator, then intersection of the oscillator line and EMA could be used as signal.