Monday, January 30, 2006

Slow, Narrow Days: What Next?

Monday was a very narrow range, slow day in SPY. Volume was approximately 60% of the 60-day average volume and the entire range for the day was only .36%. What tends to happen after such narrow, slow days?

First off, it's interesting to note that SPY volume as a % of 60-day volume correlates .51 with the daily trading range. Monitoring SPY volume in real time is an excellent way of handicapping the likely volume for the day. Seeing that volumes were running well below the normal volume for the relevant period alerted one to take profits quickly and to expect a range bound trade.

Since March, 2003 (N = 728), we've had 30 days in which the SPY range has been less than or equal to .50% and the volume has been 70% or less of the 60-day average. The average change three days later is -.43% (8 up, 22 down), much worse than the three-day average change of .19% (430 up, 298 down) for the sample overall. It appears that low volume and low volatility do not bode well for the bulls in the near term. The ratio of down to up occasions following the slow, narrow days is quite striking.

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