Thursday, April 17, 2008

Volume in the Stock Index Futures Market - Part Two

In my recent post, I suggested that a key to understanding the character of a market day was tracking the volume patterns within that day. Specifically, if volume is running significantly above normal, it means that institutional participants are active in the marketplace. This tends to bring greater price volatility and increased likelihood of breakout and trending moves--especially when we see similar moves in related markets (interest rates, currencies, commodities, etc.).

The chart above is quite informative. It goes back 24 trading days (to the first day when the June ES futures contract became the front month) and identifies the median volume and high-low price range (in percentage change) for each 15-minute period through the day. We can clearly see the smile pattern in the data: the tendency for early morning and late afternoon periods to trade with greater volume and price movements than periods midday. Indeed, price movement early and late in the day is easily 50-70% greater than midday. This suggests that uniform rules for placement of stops and price targets are bound to fail: the market is not uniform intraday.

Nor is the market uniform from day to day. These are median values, but the values for each individual day vary widely. Wednesday's trade was a great example: some 15-minute periods during the day traded at near-median volume and even lower than median price movement. Other periods were greatly expanded from the norms charted. Those were the periods contributing to the day's trending movement. Institutional traders are not necessarily active in every time period--they're not daytraders. But when we see that they are active at key junctures (during price breakouts, in response to movements in rates or currencies), it underscores the significance of moves that occur as a result.

Below are the data for the chart. Note that the time periods are U.S. Eastern time; fifteen-minute segments starting at the time noted. I use these data to tell me when volume is running above and below average and, hence, when I can expect more or less price movement. As mentioned earlier, this is invaluable in deciding when to take profits aggressively vs. (as Wednesday) let profits run.

Time Volume Range
9:30 107300 0.388
9:45 85008 0.342
10:00 91522 0.348
10:15 71411 0.314
10:30 81151 0.34
10:45 73599 0.315
11:00 60560 0.263
11:15 50261 0.296
11:30 53194 0.277
11:45 46481 0.242
12:00 35930 0.232
12:15 40276 0.235
12:30 39703 0.233
12:45 36437 0.24
13:00 38134 0.224
13:15 31076 0.193
13:30 39797 0.247
13:45 35313 0.19
14:00 47716 0.29
14:15 50910 0.248
14:30 50096 0.297
14:45 56285 0.344
15:00 57959 0.32
15:15 53862 0.33
15:30 68613 0.365
15:45 93226 0.311
16:00 71828 0.284


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