A Look at Declining Volume on Five Prior Market Tops

Nov 13, 2009: 2:57 PM CST

With the current rally progressing on lower volume, I thought I would take a moment to look back at a few historical market tops – or prior to deeper pullbacks – to see how volume behaved just prior to the top.

Let’s see five historical peaks in the Dow Jones Index and pay special attention to the trend of volume  prior to these peaks.  Each chart was created with TradeStation and you can click to zoom-in on the chart.

1973

1976

1987

1990

2007

I’ll let the charts speak for themselves as a reference instead of commenting on each individual chart.

In all cases, we saw some sort of “trailing off” or decline in the ‘trend’ of volume prior to the absolute market peak.

When the final price high came, it did so on lower absolute volume as well – no chart above shows the absolute high of the rally taking place on the highest daily or weekly volume as shown on the scale.

This is a complement post to my prior “How Else Can We Interpret Recent Volume Activity but be Bearish?“.

Looking at this development from a different – more statistical/research perspective – Rob Hanna of Quantifiable Edges recently showed results of his historical testing on rising prices on declining volume in his post “Low SPY Volume Could Signal a Pullback.

In this post, he references two of his recent studies on higher prices on declining volume – both of which had bearish undertones and results.

As a caveat, there’s never a guarantee of anything in the market, but if history is any guide, we need to treat the market with utmost caution right here, especially from the bullish side.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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Watch the Daily Divergences in Platinum Prices

Nov 12, 2009: 3:57 PM CST

Platinum Prices?  What does that have to do with stocks?  For one, the recent price pattern in Platinum resembles the recent ‘run-ups’ in stock prices.

Let’s take a quick look at the daily chart of platinum futures (index) to note the negative divergences setting in under the recent 2009 price highs and levels to watch to confirm a turn… or trend continuation and over-ruling of these pesky divergences.

This is just a quick look to note the recent swing highs and the divergence in the 3/10 Oscillator – similar to what we’re seeing in the S&P 500… only platinum prices failed to rally to a new 2009 high on the current swing up.

The $1,380 level appears to be key resistance to watch for Platinum prices.  A solid close above this level would set-up a test of the $1,400 level, and any move above $1,400 would argue against these divergence and in favor of trend continuation (meaning watch the moving averages more than momentum).

Until that happens, we might should watch closely at the hints of non-confirmation coming from the lower peaks in the momentum oscillator that are not confirming the higher swing highs in price.

Thus, watch the 20 and 50 day moving averages and especially the confluence support with the lower Bollinger Band at $1,320 for potential support.

Any move under $1,300 would argue for a short-term trend reversal and that these divergences did ‘catch up’ with price, dragging it lower.

Either move should correspond with a similar move in stock prices so watch these closely for clues to the future.

Corey Rosenbloom, CMT
Afraid to Trade.com

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Wal-Mart WMT Bullishly Breaks Weekly Long-Term Triangle

Nov 12, 2009: 12:40 PM CST

This week has confirmed a bullish breakout in Wal-mart (WMT) stock prices from a 1-year weekly triangle formation starting in September, 2008.  Let’s take a look at this bullish price break on the weekly chart.

Officially, the triangle broke out in August 2009 with a strong bullish buy bar, but price floundered under the $52 level and stalled with dojis at the upper Bollinger Band in what could have resulted in a bear trap (which would have been confirmed if price fell under $47 per share – the lower triangle support trendline and 200 day SMA).

So, technically, this week actually “confirms” the bullish triangle breakout from August in that price has formed a higher high in August, higher low in October, and now higher high in November, sweeping price above the recent $62 resistance level and upper Bollinger Band.

A break above $54 (prior price resistance from March) could likely send price up to challenge the $56 to $58 level (prior resistance from the end of 2008), which would put price in a solid uptrend and odds in favor of even higher prices.

Two caveats:

Volume – like in the general market – is forming a negative divergence, or stated differently, volume does not appear to be ‘confirming’ or ‘supporting’ this bullish breakout with broad-based participation.  Watch that to see if volume picks up – or if price fails to rally as a result.

Momentum:  Though less important than volume, the 3/10 Momentum oscillator is forming a negative divergence and also is failing to confirm recent price highs.  On bullish price breakouts, it is much more desirable to see new momentum highs accompany new price highs … or else a non-confirmation sets in.

Still, this is a development that’s certainly worth watching.

Corey Rosenbloom, CMT
Afraid to Trade.com

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How Else Can We Interpret Recent Volume Developments as Bearish?

Nov 11, 2009: 5:07 PM CST

Looking inside the most recent short-term moves in the broader market, we see a stellar signal from reading volume alongside with price.

Using classic volume interpretation methods, we can only come to one conclusion – volume insights are sending a bearish non-confirmation signal as the market grasps at recent highs, and either volume is going to have to pick-up (increase) to keep this rally going… or else price is going to have to fall via the signals from the “Voices of Volume.”

Let’s look at the 15-minute SPY chart from late October’s sell-off to the present rally into fresh highs.


(Click for full-size chart)

Under classic volume analysis, we expect that “Volume Goes with Price.”

Meaning, watch upward moving volume to “confirm” a price move – whether up or down; and watch declining volume to “disconfirm” a price move (again, either up or down).

Thus,

Rising prices + Rising volume = Bullish (continuation)
Rising prices + Falling volume = Bearish (non-confirm / reversal)

Falling prices + Rising volume = Bearish (continuation)
Falling prices + Falling volume = Bullish (non-confirm / reversal)

You can read more about this in my “Volume Voices” page at the Education Center.

How do we overlay this information into the current chart above?

As price fell from its October 21st peak, volume rose during the entirety of the down/selling phase into the $103.50 lows (from the $110 highs).  That serves as a Bearish Confirmation that sellers are ‘picking up urgency’ to sell and hints – from volume’s voices – that lower prices are ahead.

In yet another “Bear Trap” (see my prior posts:

New S&P 500 Highs Forecast by Sprung Bear Trap

A Look at the 12 Recent Failed Short-Sale Signals in the SP500

… prices did indeed manage to rally to new recovery (fresh 2009) highs… but each day brought lower relative volume, serving as a Bearish Non-Confirmation of higher prices.

The fact that price is rallying so strongly on lower volume is bearish in nature, and is a warning sign to anxious buyers on the sidelines who feel they may have missed this rally.

Now would not be the time to “panic in” to the market, if the voices of volume are correct.

Does that mean that prices are going to fall off a cliff from here?  Not necessarily – but it is a yellow light that serves as a warning – a non-confirmation, or a sign of ‘weakness’ that price alone is not telling you.

Always look ‘under the hood’ of price alone to see what else might be happening.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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Excellent Example of Intraday Reversal Preceded by Divergences

Nov 11, 2009: 12:43 PM CST

This morning’s action gave a great example of the “Divergence” lessons, in that dual TICK and Momentum divergences can forecast intraday price reversals of either short or intermediate term degree.  Let’s take a look.


(Click for full-size image)

We’re seeing the @ESZ09 or December S&P futures contract (instead of the usual SPY I show) on the 1-minute timeframe for enhanced clarity.

Price gapped up off the open and then progressed to new intraday highs on a strong rally to fresh 2009 highs as forecast by my prior post “New S&P 500 Highs Forecast by Fifth Sprung Bear Trap“.

As we achieved those new highs, an internal (and intraday) non-confirmation at the highs set-in, creating a “Dual Divergence” (or double divergence) in both the 3/10 Oscillator (Momentum indicator) and – much more importantly – the NYSE TICK (bottom panel).

That’s not to say that a reversal was absolutely guaranteed, but that internals and momentum were NOT confirming the absolute price highs and that information hinted (forecast) for a retracement down at best and reversal at worst – the reversal came to pass.

As an aside, the current intraday lows are being met with a dual Positive Momentum and TICK divergence.  This could also result in an upwards move or second reversal on the day.  Look to see if you can observe this without me labeling it.

I’ll be discussing this concept in my presentation at the Las Vegas Trader’s Expo which you can attend for free.

My presentation “Best Trades to Take Using TICK and Momentum” will be shown live via webinar, and you can attend that for free as well without having to travel all the way to Las Vegas!

If you have not done so already, register for free with the MoneyShow.com and then add my presentation into your calendar/schedule.

I will be speaking (and the webinar will be broadcast live for you) on Thursday, November 19th at 1:15 – 2:15 PST / 4:15 – 5:15 EST (just after market close).

Be sure to stop by and say ‘hey’ if you’ll be attending the Expo and join me live for the webinar if not!

Corey Rosenbloom, CMT

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