decisions entirely on bar charts. Many refer to charts for confirmation of separate technical or fundamental analjsis; others will only use the most obvious major trendlines, looking for points at which multiple indicators converge. The general 1 of bar charting analjsis and the need for visualization makes it a lasting tool.

10 Volume, Open Interest, and Breadth

Volume pattem has ahvajs been tied closely to chart analysis m both the stock and tures markets. It is a valuable piece of information that is not often used, and one Vof the few iterns, other than price, that is traditionally considered valid data for the technician. Nevertheless, there has been little research published that relates this factor to futures maikets; its popular use has adopted the same conclusions as in stock market analysts.

The stock and futures maikets have two other measures of participation that are related, yet not the same. In equities, the laige number of shares being ttaded allow for measurements of breadth, in the same way that the stock index has become a popular measure of overall maiket ttend, the breadth of the market is the total number of stods that have risen or flen during a specific period. When you have the ability to view the bigger picture of maiket movement, breadth seems to be the natural adjunct to the index.

In futures, open interest is the measurement of those participants with outstanding trades; it is the netting out of all open positions in any one maiket or conttad. and it gives an understanding of the depth of volume that is possible. A market ttiat hades only 10.000 conttacts per day, but has an open interest of 250,000, is telling ttie ttader ttiat ttiere are many participants who will enter the maiket when the price is right. These are most likely to be commercial traders, using the futures maikets for hedging

CONTRACT VOLUME VERSUS TOTAL VOLU ME

in futures maikets, in which individual conttads specify standard delivery months, the volume of each contract is available, along with the total volume of the maiket; that is. the total volume of all individual contracts. Spread transadions are not included in volume. This information is officially posted one day late, but estimates are available for many markets during the day. Total volume of crude oil is estimated even, hour and released to online news services.

Individual conttaa volume is important to determine the delivery, month that is most active. Traders find that the best execution fills are most likely where there is greatest liquidity. Analysts, however, have a difficult time assessing volume ttends because there is a natural increase in volume as a conttad moves from second month out to the neaiby and traders shift their positions to the closest delivery month; there is a corresponding decline in volume as the delivery date becomes close. Looking only at the volume of one delivery month is equivalent to ignoring seasonality in an agricultural maiket.

Each futures maiket has its unique pattern of volume for individual confrads. Some, such as the interest rates, shift abruptly on the last day of the month prior to delivery, because the exchange raises margins dramatically for all fraders holding positions in the delivery month. Currencies are very different and tend to trade adively in the nearesl month up to one or two days before that confrad goes off the board. While volume

increases slightly in the next deferred contract, anyone frading sizable positions will need to stay with the nearby contract to the end.

Other than for determining which contract to trade, and perfiaps the size order that the maiket can absorb, an analysis of volume as discussed in this chapter must use total volume, the aggregate of all confrads, to have a data series that does not suffer the pattems of increasing and decreasing participation based on the coming and going of individual delivery months. When fraders roll from the neaiby to the next deferred contrad, the transadions are performed as a spread, and those frades are not included in the volume figures. Because positions are closed out in one contract and opened in another, there is no change in the open interest

The stock market equivalent to using total volume would be to add the volume for all stocks in a similar group. This would help smooth over those periods when the volume of one stock is very low If the group is not highly correlated in price movement, the end result might be a volume series that has very litUe to do with the stock you are frading.

Tick Volume

The popularity of quote machines and fast frading requires a measurement of volume that can be used immediately to make decisions. Because total volume is not available on a timely basis to day traders, tick volume has become a substitute. Tick volume is the number of changes in price, regardless of volume, that occur during any time interval. Tick volume relates diredly to actual volume because, as markets become more active, prices change back and forth more often. If only two trades occur in a 5-minute period, then the maiket is not liquid, regardless of the size of the orders that changed hands. From an analytic view, tick volume gives a reasonable approximation of true volume

and can be used as a substitute. From a practical view, it is the only choice. Tick volume pattems are discussed later in this chapter.

VARIATIONS FROM THE NORMAL PATTERNS

One final note of waming when using volume indicators to confirm price direction: markets have pattems in volume that cause the same effect as seasonality To decide that a buy signal is more important because it came near the end of the trading day, when volume was much higher than midday, is not correct because volume is always higher al the beginning and end of the day. You may conclude, in general, that those two periods produce more reliable trading signals; however, a volume confirmation must be compared against the normal volume for that time period.

Open interest and market breadth also have seasonal pattems. In agricultural markets, farmers hedge in larger numbers during the growing season than in the winter, raising the open interest. In stods, there is a lot of activity associated with the end-of-year positioning for tax pu oses, and traditional ralljing during holiday seasons. While this predictable market activity may be enough to confirm your positions, it does not indicate that something special is occurring. Identifjing these variations will be discussed in detail later in this chapter.

Volume Drops and Spikes

Volume spikes are carefully watched because they are seen as a significant positive action by the traders. For a stock that has been relatively inactive, a volume spike is awaming that something is changing. In futures, a day of very high activity means that the market is sensitive to news. In both cases, a sharp increase in volume can be a predictor of change, or at least of higher volatility This will be discussed in the section "Volume as a Predictor of Volatility," latei in this chapter.

At this time it is worth remembering that a volume spike is a clear indicator of a positive action, while a volume drop can be ambiguous. Volume can decline because there is litUe interest in a stock or futures market; bujing and selling pressure have been eliminated. When a currency, gold, or any traded product reaches a price that is considered fair (also called equilibrium), volume normally declines. Volume may also drop on the day before a holiday, or just by chance. While there are seasonal and other predictable pattems associated with volume drops, they are far less certain than large increases.

STAM5ARD INTERPRETATION

The interpretation of volume has been a part of market lore since charting began- The best consolidation of that information was published in the monograph by WAD. Jiler, Volume and Open Interest.. A Key to Commodity Price Forecasting, a companion piece to his most popular Forecasting Commodity Prices with Vertical Line Charts (see references in Chapter 9 ("Charting")).

In both the futures and stock markets, volume has much the same interpretation, when volume increases it is said to confirm the direction of prices. Price changes that occur on very light volume are less dependable for indicating future direction than those changes associated with relatively heavy volume. An additional uncertainty exists for stods that are not actively traded, and for low prices shares where the total dollar volume can be small. In these cases it might be best to look at the accumulated volume of similar companies, or its sector.

Open interest is a concept unique to futures maikets, but helps to explain the depth of the market as well as trader expectation. New interest in a market brings new buyers or sellers, which increases the open interest, the net of all outstanding contracts being traded. When the open interest increases while prices rise quickly, it is commonly interpreted as more traders entering long positions. This may seern sttange because for every new buyer of a futures contract there must be a new seller; however, the seller is likely to be someone looking to hold a position for a few hours or dajs, looking to profit from the normal ups and downs of price movement. The position trader, who is willing to sit for much more time holding a long position, is the one who is attributed with the open interest. In reality, no one knows. However, if prices keep rising, the shorts are more likely to be forced out while the longs have stajing power.

The traditional interpretation of changes in volume and open interest (for futures markets) can be summarized as follows: