Yesterday’s minuscule trading activity confirmed that the annual summer holiday/vacation season is in full swing and the “big money” is simply not around to participate. Volume in the Nasdaq was 34% lighter than the previous day, while yesterday’s volume in the NYSE came in 27% lower. It might not seem like a big deal, but consider that volume had already been relatively light during the previous several weeks. To put this in perspective, yesterday was the second lightest volume day of the Summer, second only to the nearly non-existent volume of August 15 (the day the big power blackout occurred). As such, there was not much broad-market conviction in either direction yesterday.
The S&P futures spent most of the day trading sideways in a very tight four-point range, consolidating just below the previous day’s low. As expected, yesterday was essentially a correction by time that allowed the major indices to digest last Friday’s gap up and subsequent reversal. Markets rarely go straight up or down for an extended period of time without first correcting by price (a retracement) or by time (sideways consolidation). Both means of correction enable the intraday moving averages to eventually meet the prices of the indices and resume the direction of the trend (if there is one).
The most exciting thing that occurred yesterday was a small bounce immediately after the close of the NYSE at 4:00 pm EST caused the S&P to close (barely) positive on the day. The Nasdaq mirrored the S&P very closely yesterday and also closed slightly positive. Remember that both the S&P and Nasdaq futures continue trading fifteen minutes beyond the close of the stock exchanges each day, although the indices themselves close at 4:00 pm. This means that we do not get official closing prices for the S&P and Nasdaq futures (also SPY and QQQ) until 4:15 pm EST. If you ever noticed a discrepancy between the closing prices of the futures market and the underlying indices themselves, it was probably due to the additional fifteen minutes of futures trading.
If you are a new trader, you may be wondering why we pay so much attention to the market’s volume every day. Simply put, volume speaks volumes! Besides price, volume is the most important technical indicator you can use to determine the true strength or weakness of an index or stock. Ironically, volume also tends to be the one indicator that novice traders, and even experienced ones, often forget to pay attention to because they get too wrapped up in analyzing trendlines, support/resistance levels, and moving averages. The fact is that none of those other indicators will accurately predict price movement as much as volume. Actually, there are many professional, profitable traders who base their entire analysis purely on price and volume without ever looking at a single chart!
Volume is such an important indicator because volume leads price. Rarely will you ever see a sustained breakout or breakdown without a correspondingly sharp increase in volume. Have you ever bought a breakout in an index or stock that you thought was a “no-brainer” because all the technicals looked good but the breakout failed anyway? Chances are that the volume did not confirm the breakout by not seeing a correspondingly higher spike in volume. The same thing often happens on the downside. Selloffs and breaks of support often do not follow-through if the volume does not simultaneously increase.
When analyzing volume, we are more interested in how much volume an index or the total market is trading relative to itself, NOT just how much volume it trades in absolute terms. For example, we don’t care whether a sector HOLDR (such as SMH) normally trades 1 million shares per day or 3 million shares per day. What really matters is how does today’s volume compare with its average daily volume? If the index you are trading has an average daily volume of only 300,000 shares, but has already traded 400,000 shares by 11:00 am EST, that indicates very high volume RELATIVE TO ITSELF and it will probably end up trading two to three times its average daily volume. Therefore, if we are saying in the ETF Real-Time Room that a particular ETF or the broad market is showing high volume, we are stating that it is showing strong volume RELATIVE to its own average daily volume; we are NOT referring to an absolute number.
Because volume leads price, thin market volume tends to create choppy markets and causes trends to reverse easily. If you have been actively trading during the past several weeks, you may have noticed how often the intraday trends reversed and how choppy the market has been in general. This can simply be attributed to the seasonal decrease in market volume. The lack of follow-through occurs because it only takes a small amount of buyers or sellers jumping into the market to move prices in the opposite direction of the trend. However, once those buyers or sellers are done, prices will often revert back to where they previously were, thereby causing a lack of follow-through and choppy conditions. Any trends that form on light overall market volume must be taken with a grain of salt and an extra ounce of caution. Light volume selloffs usually indicate a lack of buyers rather than an abundance of sellers. Conversely, light volume rallies often fail because they are based on a lack of sellers, rather than an abundance of buyers. Therefore, it only takes a few big sellers to step in to make prices collapse. Last week’s rally in the broad market lacked conviction, which is why Friday’s selloff erased an entire week of gains. Overall, it is usually not a good risk to enter new positions when the total market volume is very thin.
On the other hand, average or heavy volume often causes trends to form and enables the market to follow-through. Even if a small group of sellers jump into the market during a high volume uptrending day, the uptrend will usually continue because there are enough buyers to absorb the selling volume. If you have ever watched an ETF trend up the entire day without even a minor pullback even when the market was weak, chances are that the underlying components of the ETF were probably trading on very high volume that day, enabling the ETF to maintain its price even when sellers stepped in. The same thing is true of downtrending indexes in that the downtrend is more likely to continue if the selloff if on heavy, or at least average, volume. It indicates there are enough sellers to continue the downward momentum even if some buyers step in.
In order to determine whether total market volume is heavy or light, we plot both a 5 and 50-day moving average to look for changes in volume. The 5-day moving average shows us the average daily volume for the past 5 trading days, which we have found to be a good time horizon to indicate short-term changes in volume. In general, we trade more aggressively when the total market volume is above the 5-day moving average because it indicates a short-term increase in volume, which typically leads to continued follow-through in pricing. However, when total volume is below the 5-day moving average, it usually leads to a lack of direction and less desirable trading conditions. The 50-day moving average gives us a longer term view of volume, which is useful in confirming multi-month trends (or lack thereof). We also use the crossover of the two moving averages as an indicator to a change in sentiment. When the 5-day is above the 50-day MA, it typically indicates a more sustained increase in volume. But, if the 5-day is below the 50-day MA, it points to a sustained period of decreased volume (and hence a lack of interest). Below is a daily chart of the NYSE total market volume, along with the moving averages discussed above:
While daily charts are great for studying volume over a several day to one-week period, they do not work very well for assessing intraday volume. Instead, we simply switch to an intraday chart, usually a 15-minute period, and simply compare volume based on the time of day. We do this by measuring the volume after a specified number of bars, with each bar representing 15 minutes. For example, if it is 10:30 am EST, we would simply look at the total volume after the first 4 fifteen minute bars and compare with the volume of the first 4 fifteen minute bars of the previous day. That will give you an early indication as to whether or not volume is on track to exceed the previous day’s volume. If you used this technique yesterday morning, you would have quickly and easily determined that the total market volume in the NYSE was likely to end the day significantly lower than the previous day. Note, however, that we do not use moving averages on our intraday volume charts. The 15-minute intraday chart of the NYSE volume below illustrates this concept:
Although any direct access trading platform will allow you to chart volume, one of the platforms we like is RealTick. We use a candlestick chart to view total market volume because it is visually easy to compare volume changes. For the NYSE total volume, the symbol is “$TOTVOL-N” (without the quotes). The Nasdaq total volume can be viewed by entering “$TOTVOL-Q” on RealTick. If you do not use RealTick, contact your data provider to find out if they use a different symbol. Feel free to e-mail us if you would like some more information on RealTick or brokers who use it.
By diverting more of your attention to closely monitoring total market volume each day, you will begin determining which conditions are most ideal to increase your share size and which periods indicate a reduction is necessary. The lighter than average volume over the past several weeks has prompted us to reduce the quantity of new trades, as well as our average position sizes. However, when volume begins increasing again (most likely after Labor Day holiday next week), we will gradually become more aggressive depending on overall market conditions. Remember that volume leads price and moves both to the upside and downside are rarely sustained without volume. If you formulate a plan to actively begin monitoring volume on an intraday and daily basis, I can say with confidence you will notice a dramatic improvement in your results!
Today’s watch list:
PPH – Pharmaceutical HOLDR
Trigger = above 73.25 (above yesterday’s high and hourly downtrend line)
Target = 75.05 (resistance of the 20-day MA)
Stop = 72.60 (below yesterday’s low)
Notes = Although PPH and the Pharmaceutical sector has been in a steady downtrend, we noticed relative strength in the sector yesterday. We anticipate follow-through today, as well as sector rotation back in to some of the beaten down sectors such as this one. Do not confuse this with picking a bottom or “bottom fishing” because we are only going to buy PPH if it breaks above yesterday’s high, thereby confirming a bounce. We never try to guess where an index will bottom, but we will gladly trade a bounce once the index confirms. The risk/reward on this play is better than most others out there right now.
Because PPH often has a wide spread, remember that you can follow $IPH.X to get an accurate idea of the fair value of PPH. $IPH.X is simply the index that tracks PPH; they both trade at the same price, but PPH is the vehicle you trade through.
Daily Reality Report:
Below is Morpheus Trading Group’s daily
performance report of closed trades and an update on all open positions from
The Wagner Daily (ETF Intraday Real-Time Room trades are reported
separately in The Wagner Weekly). Net P/L figures are based on the
quantity of shares represented in the MTG Position Sizing
DIA short (from Aug. 25) –
shorted 93.43, stop at 94.10, target of 92.00, unrealized points = (0.05), unrealized P/L =
We shorted DIA per yesterday’s Wagner Daily and took the full position overnight. We will update you via e-mail if we trail the stop lower today.
Click here for
a detailed explanation of how daily trade performance is calculated.
Click here for a detailed
cumulative report of MTG’s trading performance (updated weekly)
Glossary and Notes:
Remember that opening gaps that cause stocks
to trigger immediately on the open carry a higher degree of risk because the
gaps (both up and down) often do not hold. Use caution if trading stocks with
large opening gaps.
Trigger = Exact price that stock must trade
through before I will enter the trade. If a long position, I will only enter the
stock if it trades at the trigger price or higher. For a short position, I will
only enter the stock if it trades at the trigger price or lower. It is really
important to only enter the position if the trigger price is hit, otherwise the
trade becomes riskier.
Target = The anticipated price I am
expecting the stock to go to. However, this does not mean that I will
always hold the stock to that price. If conditions warrant, I will sometimes
take profits before that price, in which case I will notify you of the
Stop = The price at which I will have a physical stop
market order set. As a position becomes profitable, this stop price will often
be adjusted to lock in profits. Again, you will always be notified of such
changes in the next daily report or intraday if you subscribe to intraday
SOH = Sit On Hands (Don’t Make Trades)
under Deron’s Report Card is based on the actual price I closed my trade at, not
just the theoretical target or stop price listed for each stock. Open P&L is
based on the closing prices of the most recent trading day.
otherwise noted, average holding time is 1 to 3 days once a position is
triggered. Updates on open positions are provided daily.
Yours in success,
Deron M. Wagner