Hartle & Flow

Many equity traders and analysts focus on the advance decline statistics during the trading day. The advance decline numbers are simply the net number of stocks up from the previous day’s close and the number of stocks down on the day relative to the previous day’s close.

I prefer to focus on the up-volume and down-volume statistics released throughout the day from the NYSE and the NASDAQ. Think of these statistics as volume weighted advance and decline numbers. The up-volume is the sum of the volume of shares traded for those stocks up on the day and the down-volume is the total volume of shares traded for those stocks that are down on the day. I use the following ratios:

NYSEVolRatio: NYSE Up-Volume / (NYSE Up-Volume + NYSE Down-Volume)

NASDAQVolRatio: NASDAQ Up-Volume / (NASDAQUp-Volume + NASDAQ Down-Volume).

First, though, your CQG platform continues to plot the close of the S&P cash index (SPC5) for an additional 15-minutes for the benefit of futures traders, which closes at 15:15. Therefore, we need to create a custom session for the S&P cash index. The NYSE and NASDAQ Volume sessions are from 08:30 – 15:00.

Click on the chart with the intraday S&P 500 index, click on the Setup button, then Sessions. Click on New, name it NYSE, and create a new Session that uses the NYSE trading session “08:30 – 15:00.”

In the S&P 500 chart, the NYSE volume ratio is overlaid on the chart of the S&P 500. The time scale is 15-minute bars. The right hand scale is for the volume ratio. The red line is plotted at the 50 percent reading. Readings greater than 50 percent indicate buyers are aggressive as up-volume is dominating. Readings less than 50 percent indicate sellers are aggressive as down-volume is dominating. For example, a 40 percent reading is 60 percent down-volume. Each day’s ratio open and close is marked on the chart.

Looking at the action for 11/03, which was the Friday release of employment data, the S&P 500 climbed in the first 15-minute bar and the NYSE volume ratio was over 70 percent up-volume. Buyers were out it force. However, the buyers could not build up sustainable momentum, and the volume ratio began to head down along with the S&P 500. The S&P 500 traded below Thursday’s low, but the volume ratio held at the same support levels established the previous day (near 40 percent up-volume or 60 percent down-volume).

Despite the S&P 500 breaking the previous day’s low, the volume ratio was moving sideways and indicating that sellers were not gaining noticeable momentum. Otherwise, the ratio would have dropped further than just 40 percent.

The NASDAQ volume ratio also tells a story. At the NASDAQ, which is more dominated by technology stocks and is in my opinion the more important market index, witnessed less buying enthusiasm at the close of the first 15-minute bar. The reading is only 57 percent. This is more of a neutral reading. The volume ratio started heading down and did not hold at support at the 40 percent level from the previous day.

The NASDAQ 100 did take out Thursday’s low, and the volume ratio dropped below 35 percent up-volume or 65 percent down-volume. Sellers were dominating, but the market moved sideways and the volume ratio started climbing. Buyers were coming in. Notice the volume ratio turned up from a much higher level then the low reading from the close on November 1. The lower prices did not attract more selling.

Tracking these volume ratios based on their respective trends, support or resistance levels can give insight into the direction of the tide of the market. Remember, a rising tide will lift all ships. Knowing the direction of the tide can be of significant aid to your trading.

This entry was posted Sunday, November 5th, 2006 at 2:10 pm and is filed under Technical & Trading Articles, CQG Studies, CQG Charts. You can leave a response, or trackback from your own site.