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67 Volume Open Interest Rising Rising Confirmation of trend Rising Falling Position liquidation (at extremes) Falling Rising Slow accumulation Falling Falling Congestion phase Some of the generally accepted notions for the use of volume and open interest are: 1. Open interest increases durmg a trending period. 2. Volume may decline but open interest builds during an accumulation phase. Volume occasionally spikes. 3. Rising prices and declining volume/open interest indicate a pending change of direction. In the stock market, when confirming the direction of the overall market, the breadth of trading (percentage of rising to total stocks) should be used if it closely approximates the stocks in the index. It would be inconsistent, for example, to use the total breadth of all stocks traded on the New York Stock Exchange, to confirm a move in a portfolio that contained only the 30 stocks of the Dow Indushials. In that case, you would need to construct an indicator of breadth that used only those 30 stocks. Exceptions No method is without exceptions, including volume pattems in the stock market. There are dajs or periods when volume is expected to change, and must be considered in the analjsis. For example, volume is lighter: On the first day of the week On the day before a holiday During the summer It is equally difficult to forget that volume is heavier on triple witching day, when S&P 500 futures, options on futures, and options on the cash index all expire at the same time. In the futures markets, there are similar pattems. Lighter volume will exist during holiday periods and summei months, but may be heavier on Fridays and Mondajs during a trending market or a weather market for agricultural produrts. Liquidation often occurs before the weekend, and positions are reentered on the first day of the week. Richard Armss Equivolume Most of the techniques for using volume discussed in this chapter will multiply or accumulate volume, creating an index that rises faster as volume increases. Equivolume, a charting method introduced by Richard Arms, takes the unique approach of substituting volume for time along the bottom scale of a chart. When volume increases, the price bar is elongated to the right, rather than the standard approach of extending the height of the bar. There are no sjstematic methods for using this technique included here, and spplications parallel standard charl mterpretations; however, analjsis can represent this tjpe of chart by creating a new price series in which the daily closing price is repeated based on the relative volume. For example, if the normal volume day causes a closing price to be repeated 10 times, then a day with twice the volume will repeat that price 20 times, and a day with half the volume will show 5 prices This approach may cause a short-term moving average trend to look strange; however, a linear regression or long-term trend should reflect the importance of varjing time. VOLUME INDICATORS Both the stock and futures markets are familiar to indicators that use only volume, or those that add volume, intending to make other calculations more robust. The following section gives the most popular of these indicatcrs,
most of which originate in the stock market and many of which use the number of advancing and declining stocks. Readers should note the way in which the data is used from one technique to another and consider the significance of these changes. They will be discussed at the end of this section. Volume Momentum and Percentage Change The most basic of volume indicators are momentum and rate of change. These techniques treat volume as price. For momentum, this means finding the change in volume over a spe cific time interval; percentage change measures the size of the volume change relative to the starting value Volume Momentum = volume today - volume„toy8ago volume today - volume„« ago Volume % =-;- volume „.days=«o On-Balance Volume Made famous by Joseph Granville, On-Balance Volume (OBV) is now a bj-word in stock analyst circles. On dajs when prices close higher, it is assumed that all volume is representative of the buyers; on lower dajs, the volume is confrolled by the sellers. Although each day yields a new value, these values are added together to form a new series. The result is a volume-weighted series. In the following formula, the expression in parentheses simply uses the closing prices to produce a value of +1, 0, or -I, which then determines whether todays volume will be ackled or subtracted from the volume series: Determining the OBV manually is a simple accumulation process. In Table lO-I, there was greater volume on dajs in which prices rose and lower volume on declining dajs. This is expected in a market with a clear upfrend. The advantage of recording the OBV is in observing when the frend of the prices diverges from the OBV values. The general interpretation of OBV is given in Table 10-2. Because a volume series has many erratic qualities, caused by large variations in volume from day to day, it is most often used by appljing a frend from I to 100 weeks, then identifjing a simple volume direction when the OBV value crosses the frend. An upward frend in volume is interpreted as a confirmation of the current price direction, while a downturn in volume can be liquidation or uncertainty Simple Variation An indicator that closely reserribles On-Balance Volume is a running total of the dajs when volume increases minus the dajs when volume delines. That is, add I to the cumulative value on a day when todays volume is greater than the previous day, otherwise subtract I. This volume count indicator (VO) can he written as: Robert W Colby and Thomas A. Meyers, The Encyclopedia of Technical Market indicators (Dow Jones-Irwin, 1988) is a comprehensive study of most market indicators, including On-Balance Volume and some other techniques included in this section. TABLE 10-1 Calculating On-Balance Volume
aosing | DailyVolume | On-Mance | Price | (in 1.00(h) | Volume | | | | | | | | | | | | | | | | | | | | | | | | | | | | | TABLE 10-2 Interpreting On-Balance Volume | | Price | | | | | | | | | | Oaruplruid | | | Sidewiys | | | | Down | Weak uptrend near reversal | | | period (bonom) | | Sideways | | | | Down | | | Down | | Weak downtrend nea | | | Sidewii)4 | Moderale downrrent | | | Down | Clear downrrend | |
volume - volumcpn @abs(4nlunie,j„ - voluiiiepmoui) Volume Accumulatoi A modification to Granvilles OBV sjstem is Mark Chaikens Volume Accumulator (VA). Instead of assigning all the volume to either the buyers or the sellers, the Volume Accumulator uses a proportional amount of volume corresponding to the relationship of the closing price to the intraday mean price. If prices close at the high or low of the day, all volume is given to the buyers or sellers as in the OBV calculation. If the close is at the midrange, no volume is added. vatoday ~ \>revious + / close - low high - low -.50 x 2 x volume other Accumulation Index Techniques The Price and Volume Trend (PVT) applies volume to the percentage price change from close to close, which can be positive or negative. The Positive Volume Index (PVl) and Negative Volume Index (N\T) take the approach that a single indicator, which adds and subfracts volume based on market direction, is not as informative as two separate series that can be viewed at the same time. pvt„=pvtp, closcprevlau, / if close < closcpcevious then pvi,o<by = pvipo + volume if close > closcpus then nvi=nvipous + volume Separating Advancing from Declining Volume
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