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Volume in Technical Analysis


On 2010-03-03, By MarketVolume.com Team
Traditionally, not a lot of traders are paying attention to the volume based technical analysis. Historically, majority of indicators were developed to analyze price movements. There are several reasons why fifty years ago retail and professional traders' main focus wad price analysis only.

First reason is the volume gaps. Half of century ago, the stocks were not trader as actively as they are traded today. Therefore, intraday volume data on many stocks had gaps - when volume equal zero. When you apply technical analysis to price you may see nice smooth picture, yet, when similar technical indicators are applied to volume that has gaps you will have disordered picture which make extremely difficult to pull out something logical from it.

Second reason is the low volume. When it comes to the low volume stock, as a rule it is a common to see big number of volume spikes. One trading period you may have volume equal 10K, another trading period it could be 50K which is 400% rise. The same as in case with volume gaps, such volatility in volume makes it difficult for analysis.

Fifty years ago the main technical analysis was done on the daily data and indexes and exchange were only the trading vehicle that had more or less stable volume flow that could be analyzed. However, at that time nobody provided volume for indexes and exchanges and this is the third reason why volume analysis was not very popular at that time.

I think, the first serious input into volume analysis was made by Marc Chaikin. At that time, he already understood the importance of volume analysis. Accumulation/Distribution, Chaikin Money Flow and other volume based technical indicators developed by Marc Chaikin were directed to measure the flow of the money - whether the investors coming into the market or they are leaving, to measure how actively stock or index was traded during an up-move or during a decline - whether enough money were injected into stock to make it overbought or whether enough were pulled out to make a stock oversold.

By its nature volume allows to track and measure the trading activity and reveal changes in this activity. Correct interpretation of volume analysis allows seeing the moments of sentiment changes - when investors stopped injecting money into stock and started to pull them out or when they do not sell any more in panic and started to buy.
Nowadays there are no problems with volume data. Trading activity of stocks is much higher than fifty years ago. Volume data for indexes (S&P 500, NYSE, DJI, Nasdaq 100, etc) became available. Due to the average high trading volume there is much less stock that have volume gaps and spikes. All of this has made volume analysis available to the wide range of investors.

Professional and institutional trades already started to use volume based technical analysis in junction with price based technical indicators a decade ago. More and more trading systems base their signals on volume indicators. NYSE volume was the first volume from the group of indexes and exchanges that professional analysts started to pay attention to. Now, volume of S&P 500, Nasdaq 100, Nasdaq Composite indexes has become equally popular.

Still, as was mentioned in the beginning, majority of retail traders, historically are stuck with price analysis and they base their trading decision solely on price technical analysis. The question is why? Trend is always described by price and volume and if you analyze price only you see half of the picture only.

Technical Analysis Expectations


On 2010-02-15, By MarketVolume.com Team
More and more new investors are coming to the market by diving into trading mainly focusing on technical analysis without paying attentions to the fundamentals. This is not a bad thing and I do not want to state that all of them are wrong. However, I consider that before starting stock market trading based on the trading signals generated by technical analysis results, the one should know what he/she can expect from the technical analysis.

First of all, technical analysis is not an exact since and none of technical indicators would guarantee that chosen trading vehicle will perform in desirable manner.

If you decided to use technical analysis as a foundation of your trading you should know that this is not an easy task to analyze the stock market. If it would be easy then everyone would be a winner. If somebody made $10,000 on the market that mean that somebody (or several traders) lost those $10,000. Only in pyramid business and bubble market number of winners exceeds the number of losers. Yet, you know what happened after - pyramids and bubbles always, sooner or later, collapse and in the end winning/losing balance is restored. The art of technical analysis is to be better than the other general population of traders.

If you just came to the market you should not expect that technical analysis or some magic technical indicator will make you rich in short period of time. As a rule those who came to the stock market with the purpose of become rich fast end up with empty pockets. If you have this idea in your head, then you are a gambler and it is better for you and for your budged if you go to a Las Vegas - at least there you will have more chances to win.

No matter how professional you feel in technical analysis, if you are novice trader be prepared to lose everything you decided to allocate for trading. If you have never traded before, it is a bad idea to take all your savings into your trading. If you only starting a trading use the same principle majority of smart people use when they go to Las Vegas - dedicate for trading the amount of money that you are not afraid to lose. Prepare yourself to the fact that most likely you will lose them. As a rule when people  may take for instance $1000 with a thought that they are going to have just fun and most likely they will lose this money in exchange for fun. If you go to Las Vegas with other purpose then you are a gambler and you should stay home.

The same is when you do the first step on the stock market. Take $1000 or more (whatever you are not afraid to lose) with a thought that most likely you will lose these money, yet in exchange you will gain an experience and knowledge of trading. You will find out what a trader feels when he/she in the losing position, what does greedy buying and panic selling mean, why a trader expects to the last moment that the market may reverse in his/her favor, how once profitable position can became a loss because of greed, etc. If after that you are still confident that you want to go into real trading battle and you understand that technical analysis is not as easy and simple as it looks like, then welcome to the real world of hard work.

Nasdaq Index Analysis


On 2010-02-02, By MarketVolume.com Team
Nasdaq Composite index comprises stocks (public companies) that are traded on the Nasdaq exchange. Nasdaq exchange is the biggest over-the-counter stock market exchange in the world. More than three thousands stocks are traded on this electronic stock exchange.

At the end of the twentieth century majority of the professional stock market analysts and big institutional investors were mainly focused on the analysis of the New York Stock Exchange (NYSE). At that time NYSE analysis was the main tool that allowed getting clear picture about stock market sentiment and the health of the United States economy. Now, the US stock market is split mainly between two biggest exchanges: NYSE exchange and Nasdaq Exchange. As a consequence, more and more professional stock market analysts are looking at the Nasdaq Composite index analysis as a necessary addition to the NYSE Composite index analysis in order to receive a complete picture of the US stock market.

Each exchange is characterized by the corresponding composite index. And each index like a stock has trend that describes this index. Nasdaq Exchange is not an exception. Nasdaq Composite index price trend movements describe this exchange sentiment. However, there is a substantial difference in technical analysis applied to an exchange and to a stock.

When it comes to the technical analysis of the exchanges, there are four main parameters that are analyzed. The same as with stock's technical analysis the first parameter that is analyzed is the price of the Nasdaq Composite index.

The second parameter that is analyzed is volume. However, while stock volume represents the volume of a single stock, in case of the exchange, the volume covers summary volume of all companies listed in the index. Such Nasdaq Composite index volume is the sum of volume of all stocks traded on the Nasdaq Exchange for a given period of time.

The third parameter is volatility. In similar ways to the stocks, the low volatility of the Nasdaq Composite index would indicate confidence and bullish sentiment of the traders on the stock market and high volatility of the Nasdaq Composite index would signal uncertainty and dominance of bearish sentiment on the Nasdaq stock market.

The last forth parameter that is used in the Nasdaq Composite index analysis is the number of advance and declines stocks as well as volume associated with advancing and declining stocks (advance/decline volume). Advance/decline (also called Breadth) indicators cannot be applied to a single stock, yet they are very important when it comes to the analysis of the indexes and exchanges.

Stocks or ETFs


On 2010-01-10, By MarketVolume.com Team
All traders, when they first come to the market are facing a simple question what to trade and what trading vehicle to choose for investments. While there could be different ambitions and some investors are coming to the market for gambling with a purpose of becoming rich in short period of time I would like to focus on simple investors who have came to the market with confusion and would prefer some not extremely big but stable increase in investments.

Majority of people are coming to the stock market without knowing anything how the market works. All they usually know is that you may invest into stock. They start to look for good stocks and very soon they become frustrated - they start to understand that in order to select a few good stocks they are required to go through hundred of stocks, compare their performance, their reports, study fundamentals, etc.

When I ask some of my friends-traders about ETFs (Exchange Traded Funds) I hear the standard answer that they became familiar with stocks and they prefer to trade stocks. My second question usually is about how he/she does analysis to see what to trade and where to trade (long or short). Now comes interesting part. I would spread their stock analysis in several steps.

Step 1: Spend 1-2 month going through hundreds of stocks from different industries. As a rule, this stage of analysis includes going through earnings and other reports, comparing stock's performance, analyzing the market sector the stocks belongs to, etc. All this ends with selection of 2-10 stocks that a trader became familiar with and considers that they are good for investments.

Step2: Subscribe to the reports, charts, quotes that cover selected stocks and could be used for further analysis on regular basis.

Step 3: Start to trade by analyzing the selected stocks on the regular basis (doing fundamental and technical analysis). In addition a stock trader continues to analyze selected industry and the whole market - you need to know where the industry and market are going do not to lose the stocks.

Doesn't it look complicated? Especially when it comes to the fundamental analysis of all the reports... People are learning in the universities how to correctly analyze and evaluate a public company. Do you think an "average Joe" has time and is able to learn all the aspects of the fundamentals and apply it on practice? I am sorry for being sarcastic, yet, I am a little bit skeptical about retail traders (including me) and their abilities to perform liable fundamental analysis of stock. Maybe you can skip fundamentals if you are day trader and trade stocks in short-term, however if you are investing your pension for longer-term you have to do fundamentals - otherwise it is not an investment but a gambling.

So, what is the solution? For me, I trade Exchange Traded Funds. There are plenty of very active ETFs: QQQQ, SPY, DIA, XLF, IWM, etc. The biggest advantage of ETF is that I do not have to do fundamental analysis - no complicated and time consuming job - all fundamentals are done by professionals who manage indexes that are tracked by ETFs. All I do is the technical analysis of indexes I trade. Index analysis is a stock, industry and market analysis at the same time. For instance when I analyze S&P 500 index, the result of the analysis could be applied to trade SPY stock (S&P 500 index tracking stock). At the same time S&P 500 is considered as a barometer of the US stock market and S&P 500 index analysis reflects sentiment on US stock market. So, tell my why should I not to trade SPY, QQQQ and other ETFs and why should I go into complicated stock analysis.

Russell 3000 Trading


On 2010-01-09, By MarketVolume.com Team

The Russell 3000 Index measures the performance of the 3,000 largest companies, which represents approximately 92 percent of the total market capitalization. The Russell 3000 Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected.

Russell 3000 chart Analysis

When interpreting the chart above, you need to remember that the most important factor is the relationship between Index Price and the Volume Moving Average (VMA). This signal shows us that just before the index drops substantially, there was very large increase in the VMA. Since the index was in a slight upwards trend when the VMA surge occurred, that is a signal that professional investors are selling and that the index will soon drop substantially. It is at or before this peak in the VMA that we would make a trading decision. After the market has dropped substantially, we look for another peak in the VMA which signals a bottom in the market. In this example the VMA peak (and width) were very substantial, and therefore it signals that the market will reverse direction quite dramatically.

Below is an example of how one of our exclusive institutional investors used this signal for the index to maximize profits by trading some of the derivatives of the Russell 3000 index:

SecurityReturn
Stocks1%
Options12%

Details of the above trades, and the derivatives used for this index, can be found in the detailed overview and in the member's section of our site.

Russell 2000 Trading


On 2010-01-09, By MarketVolume.com Team

The Russell 2000 index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8 percent of the total market capitalization of the Russell 3000 Index.

Russell 2000 chart Analysis

When interpreting the chart above, you need to remember that the most important factor is the relationship between Index Price and the Volume Moving Average (VMA). In this example we see that the index is trading sideways for the first part of the day, and then VMA begins to increase quite rapidly. In this case, the index and the VMA are both increasing, this is because the professional traders are selling AND covering their shorts. Generally when an index and the VMA both increase, that signals that the index will begin to decrease after the VMA has peaked. In this example you can see that not long after the VMA peaked the index began to decline. It is just after the VMA begins to fall that you should make your trading decision.

Below is an example of how one of our exclusive institutional investors used this signal for the index to maximize profits by trading some of the derivatives of the Russell 2000 index:

SecurityReturn
Stocks0.8%
Options10%

Russell 1000 Trading


On 2010-01-08, By MarketVolume.com Team

The Russell 1000 Index measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92 percent of the total market capitalization of the Russell 3000 Index.

Russell 1000 chart Analysis

When interpreting the chart above, you need to remember that the most important factor is the relationship between Index Price and the Volume Moving Average (VMA). In this example we see that the index is trading sideways for the first part of the day, and then VMA begins to increase quite rapidly. In this case, the index and the VMA are both increasing, this is because the professional traders are selling AND covering their shorts. Generally when an index and the VMA both increase, that signals that the index will begin to decrease after the VMA has peaked. In this example you can see that not long after the VMA peaked the index began to decline. It is just after the VMA begins to fall that you should make your trading decision.

Below is an example of how one of our exclusive institutional investors used this signal for the index to maximize profits by trading some of the derivatives of the Russell 1000 index:

SecurityReturn
Stocks1%
Options13%

S&P 600 Trading


On 2010-01-08, By MarketVolume.com Team

The S&P Small Cap 600 Index consists of 600 domestic stocks chosen for market size, liquidity, (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation.

S&P 600 chart Analysis

When interpreting the S&P 600 chart above, you need to remember that the most important factor is the relationship between Index Price and the Volume Moving Average (VMA). In this example, the index has been in a downward trend for 2 days. The downward trend continues until the VMA has reached a peak and this sharp increase in the VMA signals that a bottom has been reached for the day and that professional investors are buying. Once the VMA has peaked, that signals the safest point in which to make a trading decision, as it is here that the index has confirmed a new upwards trend.

Below is an example of how one of our exclusive institutional investors used this signal for the index to maximize profits by trading some of the derivatives of the S&P 600 index:

SecurityReturn
Stocks6%
Options104%

Details of the above trades, and the derivatives used for this index, can be found in the detailed overview and in the member's section of our site.

S&P 500 Trading


On 2010-01-07, By MarketVolume.com Team

The S&P 500 Composite Stock Price Index is a market-value-weighted index (shares outstanding multiplied by stock price) of 500 stocks that are traded on the New York Stock Exchange (NYSE), American Stock Exchange (AMEX), and the NASDAQ National Market System (NASDAQ).

S&P 500 chart Analysis

When interpreting the chart above, you need to remember that the most important factor is the relationship between Index Price and the Volume Moving Average (VMA). These two signals are excellent indicators to when to short the market. In the first example we see that the index has been trending up for a short period, and that the VMA during that period has been begun increasing. This increasing VMA signals that there is a some selling pressure and that the market will change direction. The peak of the VMA signals that the market will take this new direction. But what happened was that the index only declined a short bit before resuming an upward trend on no volume. When this occurs we expect that the index will decline again soon as it did not have buying volume on it's move upwards.

On the second signal we can see that the market did change direction substantially and that the main reason for an increasing VMA here is profit taking. This profit taking will cause the index to change direction again until there is renewed buying pressure in the future.

Below is an example of how one of our exclusive institutional investors used this signal for the index to maximize profits by trading some of the derivatives of the S&P 500 index:

SecurityReturn
Stocks6%
Options120%

NYSE Trading


On 2010-01-07, By MarketVolume.com Team

The New York Stock Exchange (NYSE), the largest equities marketplace in the world, is home to about 1 companies worth more than $17 trillion in global market capitalization.

Nyse chart Analysis

When interpreting the chart above, you need to remember that the most important factor is the relationship between Index Price and the Volume Moving Average (VMA). These two signals are excellent longer-term indicators of where the market is heading. In the first example we see that the index has been trending down for over a week, and that the VMA during that period has been steadily increasing. This steadily increasing VMA signals that there is a lot of buying pressure and that the market will change direction. The peak of the VMA signals that the market will take this new direction. On the second signal we can see that the market did change direction substantially and that the only reason for an increasing VMA here is profit-taking. This profit-taking will cause the index to change direction again until there is renewed buying pressure in the future.

Below is an example of how one of our exclusive institutional investors used this signal for the index to maximize profits by trading some of the derivatives of the NYSE index:

SecurityReturn
Stocks1.8%
Options21%
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