Using Relative Volume to Assess Short-Term Market Opportunity

Here is something I watch closely while trading.  The blue line is the SPY ETF; the red line takes the SPY volume for each five-minute period and expresses that relative to the average SPY volume at that same five-minute period (30-day lookback).  The ratio is expressed in standard deviation units.  When the ratio is above 1.0, we're seeing above average flows come into the market for that five-minute segment.  When the ratio is below 1.0, we're seeing below average volume participating in that period.

Because volume correlates highly with volatility, this ratio gives a nice real-time updating of how much movement we can expect in the stock index.  Note that the couple of times we bounced above zero during the morning, relative volume tailed right back off.  It's when we see persistence of high ratio readings that we generally see range extension and short-term momentum.  In the low volume environment, we're more likely to see moves reverse before possibly continuing in their initial direction.

In the case of this morning's market, the tailing off of volume represented a pulling back of buyers; there was no influx of sellers.  While low volume is not good for momentum trades, it is not necessarily a bad thing for trend trades.

Further Reading:  Momentum and Trend Trades
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