Wednesday, May 06, 2009

Using Relative Volume to Identify When Markets Slow Down

I mentioned yesterday how the trade was a difficult one. The above chart draws upon the relative volume concept to show, half-hour by half-hour, how participation in the market compared to 2009 norms. What we see is that, from 11 AM CT forward, the volume in the ES market (blue bars) fell well below their median values for that time period in 2009 (red bars). Recall that volume is closely correlated with volatility: that shift tells us that, unless relative volume picks up, the market is going to move much less as the day unfolds. This is a very helpful alert that can help traders avoid overtrading a narrow, slow, choppy market.

Interestingly, the period of waning volume also corresponded to the drying up of selling pressure that I posted. Notice how correlating what is happening in volume with what is happening in NYSE TICK can give us some clues as to *who* is gaining and losing participation: buyers, sellers, or both. This was useful information as the day unfolded, as we were unable to sustain afternoon lows.