Afraid To Trade
Corey Rosenbloom serves as an independent consultant, analyst, author, and educator. He manages both personal and family accounts using the concepts discussed here, employing both long-term and active intraday trading strategies.
May 11, 2012
Here's an update to a prior volume-centric post that highlighted the April trend towards Distribution Volume in the US Equity Markets.
The recent sharp sell-off confirmed the earlier signals and added to the broader Distribution Picture.
Let's take a look at the current "Volume Only" color-coded SPY and DIA (S&P 500 and Dow Jones ETF) charts:
Dow Jones ETF: DIA
Start with the April 11th original "April Distribution Volume Trends" for background information and to see what the Distribution Volume picture was in early April.
To recap, according to classical Technical Analysis, volume should confirm price (part of Dow Theory).
What this means is that if Volume and Price move in the SAME direction, expect the price movement to continue.
Instead, if Volume and Price move in opposite directions, expect a future reversal.
Beyond this, we can compare how volume performs on upswings (rallies) or down-swings (declines) in price to get a sense of the bigger picture of money flow.
This can help us see if money is aggressively flowing IN to a rising market (which is bullish) or flowing out of a falling market (which is bearish).
Now, back to the current picture.
I color-coded the recent intraday swings as either "rallies" or "declines" accordingly so that we could clearly see the trend or progression of volume - rising or falling.
It should be clear that during green rallies, volume has been declining or falling (again as price is rising) and that during sell-offs or declines, volume has been progressively rising.
This points to a broader pattern of Distribution - less enthusiasm/activity during rallies and more activity/transactions during declines.
Put in the larger context of an over-extended rally and the seasonal "Sell in May and Go Away" sentiment, this at least paints a picture of caution for the equity markets.
We'll always let price be the main guiding factor, but for the moment, volume trends/signals paint a cautious to outright bearish picture that we need to monitor closely in the weeks ahead.
About Corey Rosenbloom
Mr. Rosenbloom’s interest in the stock market began as a junior in High School where his team won an investment challenge competition which drew him into investing actual money in the market using basic fundamental analysis. Later, the Bear Market of the early 2000s would challenge these assumptions and force him into deeper study of market concepts – "There had to be a better way than Buy and Hold strategies".
He was soon introduced to the concepts of price charting, or more formally known as "Technical Analysis" and the pattern recognition, along with indicator combinations, drew his attention sharply in that direction. As the market began its recovery, he was participating as a momentum intraday trader, which soon gave way to broader swing-trading strategies. He describes one of many "light-bulb" moments when he was introduced to Sector Rotation Concepts which seemed to make the price charts fit into a logical progression of expectations. From there, he deployed options trading strategies which gave way to ETF trading, which itself finally gave way to active futures market trading tactics.
Mr. Rosenbloom holds a bachelor’s degree in both Psychology (cognitive research focus) and Political Science and later received a Master’s Degree in Public Affairs with a Business concentration. He has completed Levels I, II, and III of the Market Technician’s Association’s Chartered Market Technician (CMT) program and is awaiting the official charter in early 2009.
Follow Corey on Twitter: afraidtotrade
Corey’s new book The Complete Trading Course (Wiley Finance) is now available!
He can be contacted at cory@afraidtotrade.com
Disclaimer
The purpose of this column is to offer you the chance to review the trading methodology, risk reduction strategies and portfolio construction techniques described at http://www.afraidtotrade.com. There is no guarantee that the trading strategies advocated will be profitable. Moreover, there is a risk that following these strategies will lead to loss of capital. Past results are no guarante of future results. Trading can yield large rewards, but also has large potential risks. Trading with leverage can be especially risky. You should be fully aware of the risks of trading in the capital markets. You are strongly advised not to trade with capital you cannot afford to lose. This column is neither a solicitation nor an offer to buy or sell securities.
