7 replies to this topic

[SemiBizz]

We've seen a choppy uptrend (per Eminimee) from the early June Lows in the SPX and rallied from 1266 to nearly 1390, but on very light summer trading volume. Now we see this year after year in the markets and forecasting based on indicators during this timeframe can be very tricky. Since we use PRIMARY INDICATORS of PRICE and VOLUME, we have learned not to take any of the action during these summer trading periods too seriously, because of the light volume.

Now let's look at how light volume plays havoc with indicators. We have everything from "Hindenburg Omens" to MCO Breakouts, to so-called "Thrust" indicators. What you end up with is choppy markets. Now the volume people all understand this, because they focus directly on the volume and understand how light volume creates inequities in price and you end up with the "choppy" trend.

Here's the analogy I use in trying to help people understand this. Some of us are pilots here, they understand it. On an airplane we have a device that sits on the wing called a "Pitot tube". This tube is used to measure the airflow, based on that airflow we get data that translates into instruments like airspeed for example. One of the things on your check list before you even enter the cockpit is to check that pitot tube. You see when there is even a partial blockage into that pitot tube it distorts the data. When bad data is transmitted to the instruments, you get corrupted indications. When you get bad indications, you take the wrong actions, when you take wrong actions based bad indicators, you get potentially disastrous results and can crash into the ground or things like mountains and buildings (or in this case a crash of your trading accounts). So when we have a reduced flow of volume, we see inequities in the market, when we see inequities in the market, indicators can get stretched on inequitable data as operators (F'eds) can influence markets under light volume conditions (like buying the futures market overnight or rigging the bond markets) and until STRONG VOLUME comes into the market these conditions persist. When these conditions persists we see BEARISH UPTHRUSTS in the market, and that brings us back to summertime light volume, extreme indications that need to be filtered for the trading environment and why... per Eminmee - we see "choppy" rallies.

Now the period of light volume summer trading should be ending in the near time frame... which brings me back to AUGUSTS. FIRST, lt's reference... THE LAST MONTH OF HIGHEST VOLUME AUGUST 2011, the last week of highest volume AUGUST 2011. This is still fresh, we all remember the events associated with the US Downgrade and our shameful Washington melodrama.

Now let's look at August 2007, at the time it was the ALL TIME MONTHLY HIGHEST VOLUME, and it was the 1370 low ahead of the November 2007 - 1576 ALL TIME high... 206 pts in just 3 months.

Now let's look at August 2008, a very quiet month on unusually light volume and just very sideways, the high for that month at 1313 which was the high of the BEAR MARKET LOW leg to 666. August 2008 was the "CALM BEFORE THE STORM" as what was normally supposed to be a bias UP Election Year into October, turned into the BIGGEST CRASH OF ALL TIME.

So my point pretty simple here looking ahead. We should see stronger volume come into the market per seasonal trends, but THE ONE EXCEPTION is a month like we had in 2008, when the volume did not come and the market went into "wait and see" mode - sideways on light volume. If we don't see MUCH STRONGER VOLUME, and this market goes into indecisive mode, WATCH OUT. OTHERWISE, expect volume to pick up dramatically, and you don't have to stick your neck out, because HISTORY is ON YOUR SIDE. You can wait for TREND CHANGE or CONFIRMATION based on just one indicator as long as we can still trust it and that is VOLUME. History says if you get it wrong, you are going to be VERY WRONG, and if you get this right you are going to be VERY RIGHT.

When stronger volume comes into the market, you will also see more robust readings from your indicators, in the meantime... don't get CHOPPED.

[Rogerdodger]

Great reminder.

Edited by Rogerdodger, 29 July 2012 - 01:33 PM.

[xe2dy]

One of the BEST post I've read yet !!! Thanks for sharing and I will be keeping a copy for reference.

[diogenes227]

Wow. Really good stuff as usual. Insightful.

Thanks.

Good luck and good trading.

P.S. And all of this:

Some of us are pilots here, they understand it. On an airplane we have a device that sits on the wing called a "Pitot tube". This tube is used to measure the airflow, based on that airflow we get data that translates into instruments like airspeed for example. One of the things on your check list before you even enter the cockpit is to check that pitot tube. You see when there is even a partial blockage into that pitot tube it distorts the data. When bad data is transmitted to the instruments, you get corrupted indications. When you get bad indications, you take the wrong actions, when you take wrong actions based bad indicators, you get potentially disastrous results and can crash into the ground or things like mountains and buildings (or in this case a crash of your trading accounts).

Reminds me of this:

...don't get CHOPPED."

[Echo]

Very nice post

[IYB]

When bad data is transmitted to the instruments, you get corrupted indications. When you get bad indications, you take the wrong actions, when you take wrong actions based bad indicators, you get potentially disastrous results and can crash into the ground or things like mountains and buildings

Don't crash into the ground or things like mountains or buildings. Check your pitot tube. {Sorry- the above made me think of the Direct TV ads }

Great Post.

[orange]

I suppose you are talking about the crash of Air France flight 447
http://en.wikipedia....ance_Flight_447

[SemiBizz]

I suppose you are talking about the crash of Air France flight 447
http://en.wikipedia....ance_Flight_447

One good example...

In their case, the failure was undetected, the computers were flying the airplane and completely responded to the warped input without questioning the data.

So, don't put your portfolio on autopilot and walk away from the cockpit in these light volume conditions, because it is going to do whatever you programmed it to do with stops, entries, exits. Prices will whipsaw into a triggering zone briefly, your computer will perform perfectly and put you into a losing position.