A widespread belief is that a light-volume pull back after a recent run-up is bullish, or at least, isn't something to worry about. I got this belief by reading IBD, and a major premise of Technical Analysis of Stock Trends is that "volume goes with the trends".
Thanks to Danny for pointing out this study: "Myth Busted: Light Volume on Pullback a Good Thing"
If you're not interested in reading, the basic idea was to backtest S&P performance after light volume pullbacks. Things actually, on average, got worse over the next few days.
Now that I reconsider my belief on volume, I looked at our current situation and realized Friday 3/27 was a light volume pullback:
- First, Know that aside from Friday and today, volume in the S&P has been averaging around 8 trillion shares since March 18th.
- Friday (3/27) volume was 5.6 trillion shares, with a 2% loss. This was a "low volume pullback", and I took that as a bullish sign. (Here's a short term chart showing what I'm talking about). This action then led to today:
- Today's (3/30) volume was 5.9 trillion shares traded with a 3.48% loss.
I'm tempted to say, "Well, today was a low volume pullback. The market's probably catching it's breath to rebound."
Well, it very well may be. However, it appears the "light volume pullback" is not as telling or reliable an indicator as I once believed.
What do you think?
Thanks for reading! Please rate the post and leave me some feedback
On a side note, here's my take on the market from this post:
Volume taken from yahoo finance.
Disclosure : Long SH
Good shit Hammy.
ReplyDeleteI think the psychology behind huge volume is either
a.) it is bad because a lot of people are selling
b.) it is good bc it means that all the people who wanted out got out and thus due to a lack of selling, the imbalance is to the buyside (ie capitulation)
However, the psychology behind low volume selling is
a.) not a lot of people have sold, so maybe this is a dip to buy
b.) not a lot of people sold, so there is still a lot of gas for the selloff, should the fire start
THEN, since price always trumps volume, and price is getting back to more critical levels, you may be more apt to pick option b or “fuel for fire” since people will see the price, get scared, and begin to sell.