Silver Also Shows Volume Divergence

The price hasn't yet confirmed this divergence. It is still in an uptrend. But if gold reverses, silver may soon follow. The volume on both the four-hour (left) and daily (right) charts has turned bearish.

Gold Loses Steam

Note also in the daily chart, volume has been dropping for several days, and a divergence has formed (see lower panel). This looks like a top, at least temporarily. I may be a little premature on this because the price hasn't dropped below the EMA yet, but this was an interesting reaction following Bernanke's speech this morning. I will be watching for follow-through on Sunday evening into Monday.

All the Volume Is On the Sell Side

In our day and age, when implied correlation is approaching 1 with each passing day, and when nuanced relationships are ignored, as every correlation somehow immediately becomes causation only to be invalidated, chewed out and left for dead, there is one certain and virtually guaranteed statistical relationship left, that not only persists day after day but has now become its own self-fulfilling prophecy. We speak of course of the (inverse) correlation between stock prices and volume: i.e., "volume up, stocks down; volume down, stocks up." Rinse, repeat, over and over and over. Rarely has this correlation been as pronounced (although we have been discussing it for well over a year) as over the past 12 weeks. Behold.

What this means is that any distributions only occur to the downside, and that the second retail gets suckered into stocks once again, for whatever reason, the selling pressure will again materialize as the algo decides to take advantage of the "sidelined" money and be a better seller into every bid.

Trade... or Fade?

I use volume indicators to help me determine if I should follow the momentum and enter an existing trend, or if I should fade the market and trade in the opposing direction. Both volume and trend must be in harmony for me to take the trade.

Corn - New Lows, But Volume Turns Bullish

The volume indicator has turned higher. Time to start buying!

NASDAQ Selling

The NASDAQ volume of selling is even greater than the S&P 500!

Daily Stock Chart Shows More Selling Volume

The divergence has been confirmed, and selling is picking up steam on the daily chart also. Note the selling volume increasing on the Klinger Volume indicator. We are now struggling to find support at the 20-day Moving Average.

Volume Like the Good Ol' Days

The volume of buying in the grains today is just like it used to be until last fall, when the bottom fell out of commodities. I like to see this typee of buying!

S&P 500 Chart Shows Massive Liquidations

Despite higher highs lately, the volume indicators are suggesting a different story. Some very large market participants are heading for the exits in a hurry!

Volume Almost Non-Existent for Stock Futures Overnight

I've never seen the volume for stock futures to be this low. On a normal trading day, stock index futures will trade volume of about 2,000,000 contracts. Overnight, only 51,000 contracts were traded on the S&P 500 futures! Clearly, many traders have taken an extended Easter Holiday weekend. This tick chart shows that the entire trading overnight didn't even complete a single screen. Wow!

How ETF's Can Provide Valuable Information

from Dr. Brett-
A very nice set of ETF resources can be found on the Morningstar site, which tracks the returns of ETFs over 1 month, 3 month, 1 year, 3 year, and year-to-date time frames and ranks the ETFs by trading volume. A particularly unique feature identifies ETFs relative to their "fair value", so that investors can identify undervalued opportunities. A screener also helps traders identify ETFs by their investment style, returns, and expense ratios.

When we look at ETF performance and volume, we can gain some insight into hot market themes. Not surprisingly, ETF daily volume is dominated by the SPY and QQQQ instruments for the S&P 500 Index and NASDAQ 100 Index, respectively. After that, it gets interesting. The third most popular ETF as of Thursday's trade was the S&P 500 Index financial stock sector ETF, XLF. It is down over 11% over the past month, compared to SPY, which is only down 2.58% over that same period. The high volume decline suggests widespread pessimism about this sector, despite Fed (and sovereign wealth fund) attempts at relief.

Fourth and sixth in volume are the UltraShort vehicles for the QQQQ (QID) and SPY (SDS). These enable traders to take double-size short positions on the indexes, and thus are instruments favored by very bearish participants. Since the start of 2007, 20-day volume in QID, for example, has expanded over 10 times. Once again this speaks to the pessimism of market participants--and their desire for leverage, a theme I'll be touching upon in my next post.

Significantly, we have ETFs representing market indexes from Japan (EWJ), Emerging Markets (EEM), Brazil (EWZ), EAFE (EFA), and Taiwan (EWT), and Hong Kong (EWH) in the top 20 volume list--a strong indication of the degree to which investors and traders are taking a global perspective on markets and diversifying beyond the U.S. It is interesting to see the Brazil ETF at #9 in volume, given that it is up over 9% in the past month--a clear outperformer relative to U.S., Asian, and European bourses.

Finally, also within the top 20 ETFs for volume are instruments for S&P 500 energy stocks (XLE), S&P 500 materials stocks (XLB), and gold (GLD). This is a clear reflection of the flow of money into commodities and commodity-related issues. All three are up on a one-month basis, a notable contrast to the broad indexes, which are all lower over that period.

The above, of course, is a static view of volume and performance. It is the flow of funds in and out of ETFs that help us identify sectors and themes gaining favor. By tracking these statistics over time, we can follow in the footsteps of institutional investors and ride important market trends.

RELEVANT POST:

Tracking the Stock Market's Largest Traders

Volume This Week Just 1/3 of Normal

The trading volume for many futures this week is only about 1/3 of normal. I have decided that liquidity is so poor, I'm not going to attempt to trade again until next week.

Example Why It's So Hard For Speculators to Control Prices

In this screen capture, I am showing the data window (at the right side) for a 3 minute candle for the DTO ETN. DTO is the new Powershares/Deutsche Bank Double Short of crude oil. This fund is growing very rapidly, and will soon begin to rival the famous USO (long crude oil) ETF that has been around for years.

Needless to say, the price of crude oil has dropped significantly in the past couple of days. However, this candle makes the point very powerfully how difficult it is even for large funds to affect the crude oil market.

Note in this data window the UP volume purchased within this 3 minute period. Since this is an inverse fund, the up volume represents selling (shorting) of crude oil. The previous ten candles had combined total volume of less than 100,000 shares (for ETNs, I believe they use the term "notes" rather than shares). This one 3-minute candle had UP volume -- selling crude oil -- of 506,700 shares! More than half a million shares selling crude oil short within 3 minutes! That is unbelievable volume! And yet, with about a 50:1 ratio of buying to selling on that candle, the price moved down (so crude moved higher) within 5 minutes! Even the huge USO fund (the largest -- so far -- of the crude oil ETFs) had volume at that same moment in time of only about 300,000 shares, and 200,000 of those shares were also selling crude oil, adding even greater volume to the crude selling.

And what was the result of all that buying (shorting of crude oil) in this ETN? The price of the ETN moved down. In other words, all that shorting of crude oil and the price of crude oil went HIGHER, because the value of the ETN notes immediately went DOWN. The two largest crude oil funds sold more than 700,000 shares/notes of crude oil in 3 minutes, and the price of crude oil rose instead!

One of the reasons for this is that despite heavy buying or selling by one very large fund, the effect of that buying or selling is very short-term in its consequences, lasting just a few moments. No matter what the size of a fund's order, it still only counts for just ONE order to buy or sell crude oil. As soon as that fund stops buying or selling, the effect dissipates almost immediately.

The second screen capture (above) shows the volume for the small green candle immediately following the small (red) one I discussed above with more than 500,000 volume (this original candle still is shown with the green arrow in this screen capture). This new candle (the one after the green arrow) shows a more normal volume of only 2800 shares (both up and down combined). It also showed prices move marginally higher (crude slightly lower). These 2800 shares had about the same impact as the 500,000 from the previous candle!

The third screen capture (above) shows the volume for the first long red candle that sends prices lower. This is the 3rd candle following the original one where the green arrow appears. It shows volume of 4200 notes, including 2700 being sold. Remember that since this is an inverse ETN, when the price of the ETN goes down, the price of oil goes up! Thus, less than 10 minutes after someone shorted oil to the tune of 500,000 shares in this large ETN, prices moved substantially against the position just purchased, and the price of crude oil moved higher! If you shorted oil, that would be a painful lesson.

Thus, even a very large fund buying crude oil in massive volumes can be easily offset by just a few small traders selling smaller volumes at the same time. In the example above, the effect of the 500,000 notes that were selling crude oil were quickly nullified by the few thousand (2700 in this last candle) that were buying crude oil. This must be very frustrating for large funds to know that small investors and traders can have almost as much impact on the market as they can, offsetting all that buying and selling of the big funds with much smaller trades that have just as much impact.

The point of all this is simply to underscore how incredibly difficult it is for one person, a group -- or even a very large fund or investment bank -- to drive the price of crude oil higher. Speculators simply don't have the kind of power to drive prices that is sometimes attributed to them.

Congress should wake up and learn the lesson the market is trying to send them. It's is a very silly argument (suggesting that speculators drive prices higher) once the facts are known! Congress needs to acknowledge that it is -- at least in part -- bad policy that is affecting the supply and demand for crude oil worldwide, and the blame needs to begin where that policy starts -- in Congress' own house -- right at home. Until that changes, the fundamental reasons for high fuel prices will stay the same, and prices will likely remain elevated.

Crude Oil Moves Higher on Expiration Day

This chart is today's tick chart for the oil contract that expires today. Since the contract will expire today, the volume is relatively weak compared to more active contracts. Just one week ago, this contract had volume of many times more than today.

If prices dropped precipitously on the expiration day of a futures contract, one could make the argument that the off-setting activity of speculators was the key cause of that rapid drop; commensurately, one could make the case that the rising prices prior to today were also caused by speculators. However, since prices are rising strongly on the day of contract expiration, as speculators are being forced to sell en masse to exit the market, this is evidence that commercial hedgers are driving oil prices higher, not speculators. While these commercial hedgers are the key reason that prices move higher, both commercial hedgers and speculators add needed liquidity to the market.

Resistance at Yesterday's Settlement Price

Note in this chart of soybeans today that prices are struggling to main the settlement price from yesterday, denoted here by the dotted red line.

Each day, there are usually 2-3 very good trades that make most of the money. They most frequently occur near the beginning of the trading session during the day. 95% of all trading volume occurs during the day session between 10:30 am and 2:15 pm EST. However, these small trades add up also. I often will make more money on short, small trades like those depicted here than on the 2-3 large trades.

How do I know which trades will be the big ones, and which ones will be worth only a few ticks? I don't! I have to be in it, to win it! Thus, I keep reminding myself that I must keep my head in the game at all times! Being resolute in taking trades is a necessity in this business. Today and yesterday are good examples of staying with the trading to come out ahead and achieve my objectives. Grit, guts, constancy, and dauntless tenacity are a necessary character trait that are required and developed in this business.

Wheat Trading Back to Normal

Today, wheat trading has resumed normal trading volatility, although volume is still a little light.

Weak Wheat

The past few days, volume trading for wheat has been quite weak. Wheat trading today has only 1/3 the volume of soybeans. I have stopped trading the grain until activity picks up again.

Change Contracts Tonight

I change my contract months when the added total of Open Interest plus Volume for a given contract becomes greater than the front month contract. It appears that this condition will likely occur today.

[OI(n) +V(n) > OI(f) + V(f)], where:
OI - Open Interest
V - Volume
n - new month
f - front month

If I am forced to make a choice when it is a close call, I will usually trade the contract month with the greatest volume. Volume, for me, represents liquidity!

Lethargy Lifts?

Volume is still unusually low in the grains complex. However, there has once again begun to be sufficient volatility to place trades. While charts are still somewhat erratic, profitable trading can be achieved once again.

Soybeans - good start, but without strong volume

Soybeans trading has started the day without a lot of the type of volume that is typical. This may indicate that no strong price pressure exists due to demand or supply. It is also probably an indicator of the high probability of range trading, as traders alternate long and short positions due to lack of conviction.