Volume Confirms Price

Monday, July 31, 2006 | 11:14 AM
in RR&A

NOTE:  This Trading alert was originally posted at Ritholtz Research & Analytics on Fri 7/31/2006 11:27 aM EDT; An email went out to subscribers alerting them shortly there after.

This is posted here not as investing advice, but rather as an example of a trading call for potential subscribers. We expect to post future advisories in a similar manner -- after the call, but in the correct chronological location on the blog.

It’s an old Wall Street saying, and its one of the few that’s true: Volume Confirms Price

Why is that? Because volume reveals what the level of institutional involvement is. And Institutional participation is important for several reasons:

1.    Mutual funds, Trusts, and hedge funds account for more than 50% of the trading volume on NYSE;
2.    Institutions make buys or sells over longer periods of time, averaging into their positions. That is what accounts for persistency of trends;
3.    Monthly contributions via 401k and other vehicles constantly force them to put money to work;

A market surge on high volume tells us more than just the price action does alone. As individuals, you get to legally front run the big boys. When we see them buying with both fists, it usually lasts more than a few days. Big volume moves tells us that institutions have conviction – a level of certainty.

Without their active involvement, rallies simply don’t go very far.

Friday’s rally is a perfect example – it was actually on lighter volume than the prior two days. In fact, most of Friday’s rally occurred between 10 and 11:30. That’s not exactly what one calls inspiring. The rally lacked the sort of institutional conviction that leads to lasting improvement in prices.

This doesn’t mean that we ignore the price action. It looks like July has become a round trip – Price levels are back at just about where they were in July 1. That implies a lot of wasted energy on the part of the Bulls.

However, we always respect the price action (even if its short term in nature), and will reverse ourselves when we see the requisite proof that a credible rally – meaning more than a bounce of a week or two – is in the offing. That can happen in at least two ways:

Last week, I mentioned that one of the ways markets create reversals and buying opportunities is by becoming deeply oversold. Another way is simply time:  After enough time elapses, markets work off their overbought conditions. Time also improves charts, as downtrends get broken via sideways activity. This could very well lead to a brief summer rally – somewhere in August perhaps?

Our longer term Marco-economic expectations are playing out according to script. We remain negative later this year – despite the recent improvement in price action.

Watch these four asset classes – gold, U.S. dollar, oil/nat. gas,  and stock markets – all moving up together.  That is very unusual at this stage of the economic/market cycle. They should decouple at some time in the not too distant future.

Monday, July 31, 2006 | 11:14 AM | Permalink | Comments (0) | TrackBack (0)
de.li.cious add to de.li.cious | digg digg this! | technorati add to technorati | email email this post



TrackBack URL for this entry:

Listed below are links to weblogs that reference Volume Confirms Price:


The comments to this entry are closed.

Recent Posts

December 2008
Sun Mon Tue Wed Thu Fri Sat
  1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31      


Complete Archives List



Category Cloud

On the Nightstand

On the Nightstand

 Subscribe in a reader

Get The Big Picture!
Enter your email address:

Read our privacy policy

Essays & Effluvia

The Apprenticed Investor

Apprenticed Investor

About Me

About Me
email me

Favorite Posts

Tools and Feeds

AddThis Social Bookmark Button

Add to Google Reader or Homepage

Subscribe to The Big Picture

Powered by FeedBurner

Add to Technorati Favorites


My Wishlist

Worth Perusing

Worth Perusing

mp3s Spinning

MP3s Spinning

My Photo



Odds & Ends

Site by Moxie Design Studios™