Friday, May 30, 2008

A Volume Pattern That Makes A Huge Difference

On Thursday the market finished higher for the third day in a row. In my “Count To Three” post back in February I showed how 3 higher closes when the market is trading below its 200-day moving average has a negative expectation over the next week or so.

Below are some more detailed statistics of how the market has responded to this pattern:

So the move we’ve seen over the last 3 days creates a negative expectancy in the near future, right? Not so fast. Notice how NYSE volume rose over the prior day on both Wednesday and Thursday. Higher volume on up days is supposedly a good thing. So let’s break it down further.

In this next table I show all instances when our volume pattern of rising two days in a row didn’t occur:


In this case things look even worse.

So now let’s look at those times when the supposedly positive volume pattern of the last two days played out:


Quite a striking difference. The increasing volume changed the expectation of the price pattern from strongly negative to solidly positive. This is an example of why traders should not simply look at price in a vacuum.

Those who would like to see more research on how the market reacts following rising or falling periods may want to check out Dr. Steenbarger's recent interesting post on the subject.

Also, for those that may not have noticed, the CBI dropped back to "3" today. This puts is back in what I consider to be a neutral state. The "5" reading I discussed a couple of days ago turned out to be a winning signal - perhaps a good sign for the market that pullbacks may be less severe than they were in late 2007 - March 2008. We'll see.

2 comments:

Paul said...
This comment has been removed by the author.
The Market Speculator said...

I enjoy analysis of volume patterns, as they are fundamental to my own trading strategies. However, I'd be weary of hanging my hat on anything that has to do with volume during holiday weeks. The added volume could be attributed to people getting back from 4 or 5 day weekends.