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.
Volume Patterns
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 volume 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.
