Analytical Toolbox: Moving Average Volume
March 12, 2009
Volume data is second to price when it comes to assessing trends. Volume analysis may be considered a relatively basic tool; however, that doesn't make it one that should be disregarded. When completing your market and security outlooks, be sure to keep the following things in mind:
- Volume should increase in the direction of the trend to confirm the move. If volume is diminishing as the current trend progresses, it is said to diverge and making the move suspect.
- Monitor relative volume levels when price is moving towards support or resistance for clues about the likelihood of these levels successfully holding.
- Consider adding a moving average [MA] line to help you assess relative conditions.
- Be sure to wait for all data needed for your period (i.e. end of week on weekly chart).
Remember that volume is considered a leading indicator.
Volume Based Tools
In addition to assessing relative levels with the aid of objective MAs, traders should consider including a volume-based indicator to help clarify their analysis as needed. A shortlist of such indicators includes:
- On Balance Volume [OBV]
- Chaikin Money Flow [CMF]
- Accumulation/Distribution
- Breadth Indicators (Up Volume, Down Volume, Arm's Index " etc.)
This is definitely not an exhaustive list.
Current Conditions
Figure 1 provides a daily chart for SPY, the Standard & Poor's Depository ReceiptsTM (SPDR®) exchange traded fund which tracks the S&P 500® Index. IT also includes volume bars with 20 day simple moving average [SMA], OBV and a 20-day CMF. Focusing on the lower lows in price for SPY from early to mid-March, all three volume tools provided potential warnings of trouble for this short-term trend along the way.
Figure 1: SPY with Volume Bars, OBV and Chaikin Money Flow
click here for larger view
Although volume initially increased with the first two lows, it peaked with the very moderate rise around the 6th and fell below the SMA with the most recent low on March 9th. This was not the case for CMF which seemed to moderate more with the two initial declines and confirming the recent low. OBV diverged from the down trend by moving sideways in March and moved upward confirming the strength on Tuesday the 9th.
There is no single correct tool. Selection should be based on the trader's style and a second tool should be considered for assessment purposes. When reviewing the current situation, keep in mind that daily price and volume action represent shorter-term moves, which are considered weaker than intermediate-term and long-term moves.
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Clare White
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
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