Thursday 25 January 2007

Volatility and Volume Churn

The Emini closed down 17.00 points at 1,429.25 on Thursday. What a roller coaster couple of days! The trending phase of the market is definitely over and we are now in a cyclical phase where the market tries to decide which way to trend next. Let me show you how the Volume Churn indicator can help to highlight market turning points.

Emini Volume Churn Image

The chart above shows 135 minute Emini bars plotted with the Volume Churn indicator below. I use 135 minute bars in this case because there are exactly 3 of these bars each normal trading day - morning, lunchtime and afternoon if you like.

Remember Volume Churn is simply Volume divided by Range. High Volume Churn at market highs signals a large number of sellers coming in and preventing prices rising any higher and so limiting the bar's range. High Volume Churn at market lows signals a large number of buyers coming in and preventing prices falling further and so also limiting the bar's range. High Volume Churn is shown with red histogram bars and also text automatically plotted on the chart.

Looking back at the last week…

On Friday (19th) we had 2 high volume churn bars, signaling the market had sellers coming in and preventing the market rising.
Then on Monday morning (22nd) the market collapsed - a nice short trade if you caught it! But then during lunchtime and Monday afternoon volume churn was high again, signaling buyers were coming in and preventing the market falling further.
We then had a 2 day rally during Tuesday (23rd) and Wednesday (24th). At the end of Wednesday we had high churn again, signaling sellers coming in and preventing the market rising.
Then today Thursday (25th) the market collapsed - another nice short trade if you caught it!
Now, once again, this afternoon we had a very high volume churn reading. Chances are, the Emini will find it hard to fall further with buyers coming in between 1,425 and 1,430.

Although today felt like the bulls finally capitulated, all is not as it seems:

High Volume Churn at the end of the day showing buyers coming in
Despite the sharp drop in the market the Trading Index (TRIN) was only neutral at 1.41 (range -100 to +100)
Climax down day with 1.4 million contracts traded, the largest volume traded since 1 December 2006

With the bond market in decline and professionals heavily short (Commitment of Traders) I still believe the prolonged up trend in the Emini is over. So time to trade the cycles.

Click here to watch a video tutorial and download free code for the Better Volume Indicator. Good luck with your Emini trading.