Friday, March 12, 2010

Testing Common Knowledge About Volume On An SPX Breakout

In last night’s Subscriber Letter I looked at the breakout to a new closing high in the S&P 500. I defined a breakout to be a close at a 50-day high after having no closes at a 50-day high for at least 10 days. In general these breakouts showed positive momentum for about a week and then fizzled out. I broke down the breakouts a number of different ways. One way was by using volume. I wanted to test the common supposition that high volume was better when an index broke out. Those results were quite interesting and I’ve included them below. First instances like yesterday with lower NYSE volume.

Here we see a solid inclination for some upside follow through over the next week. But how does this compare to those times that the volume came in higher on the day of the breakout?

What was a decent edge over the first week is now essentially edgeless. Many times on this blog I’ve shown how common trading knowledge is often wrong. This serves as yet another example of why it is important to question common knowledge.

If you’d like to see more results related to my study of breakouts last night you may you may take a free 1-week trial of Quantifiable Edges by signing up here. If you’ve trialed in the past but not in a while, then you may email me at support @ quantifiable (no spaces).


GONG said...

hi there, how would u compare the implication between the bullish study here and the previous intermediate bearish one?

Rob Hanna said...

It's not unusual to have studies in conflict with one another. Like indicators, they rarely all line up perfectly with the same message. I use the "Aggregator" tool to help me determine my bias. I've also turned the tool into a system. There are some links you can read and explore if you start with the post below:


MarketFeel said...

very interesting study. My own studies have shown recently that volume is less of an issue. I think we have to put the volume in context. To me it takes more volume in the beginning of a move than later in the move. It takes enough volume to get people thinking bullish then as the indexes move up they will sell for small profits and raise cash then buy again and smaller traders will short and cover. This creates low volume continuation of an uptrend. The people that missed the party still want in and after going short in January only to get eaten again are looking for another deep pullback to go long and join the party. And that is what I am seeing but since they don't see improvement around them it is hard to go long right now. The classic wall of worry. In my opinion large volume at the end of the move signals an ending and finally sucking enough people in. In my discussions with traders the smaller ones are less bearish but still fighting it and wanting a deeper pullback to go long and the bigger traders are still sitting on some cash but less. A deeper pullback at this point like the early january pullback would be bearish so I am expecting shallow ones until more volume sucks us all in long. I think a good volume study at this point would be volume as a percentage of available capital. According to haver analytics available cash is at historic lows as funds chase performance so a volume spike at this point to me would be exhaustion.