Tuesday 16 January 2007

Volume Churn at Highs

The Emini closed down 2.00 points at 1,438.75 on Tuesday. Low volume day with only 0.7 million contracts traded and very small range of only 5.75 points. As a result the Volume Churn was high. Take a look at the chart and Volume Churn explanation below.

Emini Volume Churn Image            NoS = No Supply (bullish) pattern; NoD = No Demand (bearish) pattern

Am I alone looking at Volume Churn?

The chart above shows a histogram of Volume Churn below the daily Emini bars. To me, churn seems such an obvious market measure, but I've never come across it in any trading books I've read. Just to recap:

                    Volume Churn = Volume / Range

Volume Churn can be calculated on any time frame, but I pay particular attention to daily charts for futures (and weekly charts for individual stocks). The vertical bars are colored red when the Volume Churn reading is higher than the last 20 bars. Again, thanks to TradeStation EasyLanguage this is easy to code and appears automatically. Periods of high churn usually occur when the market is changing direction - either at tops of bottoms. The red line superimposed on the Volume Churn bars is the long term average reading.

No demand pattern too

We also had a No Demand pattern today. This occurs when a new high is made but the market closes near the lows on low volume and low range. Conversely, a No Supply pattern occurs when a new low is made but the market closes near the high on low volume and low range.

This pattern signals little appetite for taking prices higher or lower and often occurs near significant turning points. Again, this pattern is plotted automatically in TradeStation as a text object - below the bars for the bullish No Supply pattern and above the bars for the bearish No Demand pattern.

Trend oscillators have now become overbought and two of them have started to turn down. In addition, we have some exhaustion patterns with high Volume Churn, No Demand price pattern and NASDAQ closing down while the Dow was up. We could be close to the completion of this final Wave 5 up move.


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Wednesday 27 December 2006

"Get Out" Exhaustion Pattern

The Emini closed up 8.50 points at 1,437.25 on Wednesday. Record high on the Dow of 12,511 with very low volume. Fund managers are up to their usual end of year "window dressing" - and they'll probably try to keep it going until the end of the week. But watch out - we got a classic exhaustion pattern I call the "Get Out" pattern today. Read about it below.

Emini Exhaustion Pattern Image

The Emini gapped up 2.25 points on the open at 1,431.00. Then we almost had an exact replay of yesterday's action. A quick low at 1,430.50 then racing ahead in the first 45 minutes. The market then slowly ground higher to reach a high of 1,438.75 before profit taking in the last 15 minutes. The Emini eventually closed at 1,437.25. Range for the day was close to average at 8.25 points but volume was again very light at only 0.4 million contracts traded.

Volume has been steadily declining since the beginning of December. Low volume is expected around the Holidays, but the marked drop off in volume during the whole month is now clear. Check out the chart above with the declining yellow line above the volume histogram.

Rare exhaustion pattern today

 

Today's action is a sign of professional profit taking. The Emini gapped up in the morning and stayed strong all day, but higher churn than the day before signals distribution. The exhaustion pattern I look for consists of:

  • A gap up day
  • Volume greater than yesterday's volume
  • Range less than yesterday's range

The chart above shows occurrences of this pattern, labeled “GetOut”. If you use TradeStation then the EasyLanguage code is:

L > H[1] and V > V[1] and Range < Range[1]

Over the last 20 years on the S&P there have only been 61 occurrences of this pattern - about 3 a year. The pattern signals turning points quite accurately, however, back-testing long and short versions of this pattern only generates a profit factor of 1.49 (using entry on next open, bail out exit and relatively large stop loss). If you add an extra condition that the close be less than the open for short signals (and vice versa for long signals) then the pattern is invincible - but even more rare!

Professional "window dressing" may last until the end of the week but we have other signs of weakness in the Emini with bonds in a downtrend, the NASDAQ very weak and an approaching downturn in cyclical indicators.


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Tuesday 7 November 2006

Profit Taking Pattern

Profit taking today. The Emini closed up 5.25 points at 1,389.00 on Tuesday. But watch out - there was profit taking by professionals going on. Do you know what pattern to look for?

Emini Profit Taking Pattern Image

Stopping Volume Pattern Chart

Yesterday's advance continued today. The Emini opened up 1.25 points above yesterday's close at 1,385.00. Once again the market shot ahead in the first 45 minutes, then continued to grind higher and reach a high of 1,393.00 around midday. The professionals then stepped in and took profits and the Emini eventually closed 4 points off the high at 1,389.00.

A useful profit taking pattern

Today's action is typical of professional profit taking. Range was below average at 9.75 points and volume was above average at 1.2 million contracts traded. The profit taking pattern I look for consists of:

  • A new high
  • Volume greater than yesterday's volume
  • Range less than yesterday's range
  • Close off the highs

The chart above shows occurrences of this pattern, labeled “stop”. If you use TradeStation then the EasyLanguage code is:

V > V[1] and Range < Range[1] and H > H[1]

Check out the daily chart of the NASDAQ and you can see the same pattern. Download the EasyLanguage code here.

Software Bug Warning: Occasionally on TradeStation tick charts a Stopping Volume pattern will be plotted where the bar's range is NOT less than the previous bar. This appears to be a TradeStation problem and luckily does not occur frequently. Thank you to Sam Beckers for pointing out this bug.

But trend intact

The intermediate trend started by yesterday’s strong advance appears to still be intact and today was just profit-taking mid-trend. However, if we break below 1,370, this could represent a change in trend and today’s action was part of forming a double top.


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Friday 29 September 2006

Shrinking Range and Volume

Trading volume and range shrank to a new low today.  The Emini closed down at 1,345.50 on Friday.  This is the fourth sign of weakness that we've seen in the last four days.  Keep reading below, and I'll explain how I use volume and range to find market turning points.

Volume Range Image

Volume and range combined are useful indicators of market tops and bottoms

For a market to move strongly, either up or down, it needs fuel.  This fuel is volume and the result of applying this fuel is range.  By volume I mean the number of futures contracts traded, not open interest; and by range I mean the difference between the daily high and low (note: sometimes referred to as spread).

At market tops the fuel runs out and volume and range both shrink.  Occasionally “blow off” moves can be seen, where volume and range are very high and price rises exponentially.  This pattern is more typical of individual stocks rather than stock market indices.  However, at market bottoms this pattern does work for stock market indices.

Traditional indicators can be improved upon

Volume is not well understood or interpreted in most market commentaries I've read.  The difficulty lies in combining the volume reading with whether the market is trending or range bound, whether opening and closing prices are close or far apart, and whether the range of the bar is high or low, etc.  Traditional volume indicators generally combine volume with the direction of the close and choose to ignore range.  I prefer to combine the volume reading with range and ignore the direction of the close in my calculations.

The indicator I use is not easy to explain without going into some detail.  Besides, I'd rather keep it to myself - for that reason I’ve called this indicator my Secret Weapon No. 1.  It’s plotted on the chart above and labeled Secret 1.  Daily bars with low values are painted white and bars with high values are painted red.  Today's reading on my Secret Weapon No. 1 was zero and readings of this indicator over the last couple of days have also been very low.  The fuel needed to keep the market moving up is running out.

And combining non-correlated indicators is the key

When we combine this observation with the three other signs of weakness identified earlier this week, they show a bearish picture.  If you remember on Tuesday we had the Dow racing ahead of the NASDAQ; on Wednesday we had a Trading Index (TRIN) divergence; and on Thursday a Doji candlestick pattern.  All non-correlated market indicators that together show a possible high probability market turning point.

Following-up on yesterday's comment about not being able to generate a very profitable Doji pattern trading system - I did some more testing and found a pattern that did work reasonably well.  The pattern I found consists of an up close, followed by a Harami Doji followed by an up close to generate a Sell signal.  Buy signals are obviously reversed.  Remember I'm defining an up close as the close being greater than the open.  This pattern generated a profit factor of 5.0, using large stops and bail out exit, but only 44 trades in the S&P over the last 20 years.  Today’s close was down so the pattern doesn’t apply for tomorrow.

Do a Google search for volume, range or spread to find more information.

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