Friday 24 October 2008

Volume Patterns at Market Tops

Market tops take a while to develop with Professionals taking profits and entering short positions gradually. Here's an intraday Emini chart from Friday showing the Volume Patterns that you often see.

Emini Volume Patterns Image

Volume Patterns at Market Tops (Emini 2,097 tick)

The topping process starts with Volume Climax up bars followed by High Volume Churn (red and blue price bars in the chart above). High Volume Churn occurs when the volume traded is high by the bar's range is small - this shows sellers are entering the market and preventing the price advance.

The next attempt at the 895 high happens on Low Volume with a Low Volume Up Close bar (yellow price bar in the chart above). This shows a lack of Demand and indicates the up move is suspect. This move also coincides with an "End of Trend" Hilbert Sine Wave signal.

Just a point of interest - if you're using Tick Bar Charts and a volume histogram, low volume bars show that the average trade is small. The average trade is small when Amateurs are trading, so whenever I see a Low Volume (yellow) bar I know that it's the non-Professionals entering the market and I probably want to be doing the opposite!

The final attempt at 895 happens with a spike up bar that closes on the Low and coincides with a cyclical top turn. We've now tested 895 three times with profit taking then No Demand and finally a rush for the doors - a 30 point decline ensues.

The chart above uses the Better Volume Indicator and PaintBar. The code has gone through a number of revisions over the past 6 months. One day I'll get around to updating the Better Volume feature article. But in the meantime, if you'd like the FREE TradeStation EasyLanguage code you can download it by clicking below.