More Post Crash Analysis: Examining Volume Surges

Friday’s volume surge was greater than 2.75 times the 50 day average volume. If we treat volume as an indicator, and ignore all other variables, what does a surge in volume portend for the short and intermediate terms?

First, since everyone is concerned with the next several days, let’s look at next day, two day, and three day returns. To be clear, I have calculated returns this way: Two day returns is the return on day two after the volume surge. It is NOT the return of the first AND second day after the volume surge. The same calculation is used for the three day return.

Next Day Return

Average Next Day Return = 0.17%

% of Winners = 42.31%

Second Day Returns

Average Second Day Return = -o.08%

% of Winners = 55.10%


Third Day Returns

Average Third Day Return = 0.14%

% of Winners = 54.35%

Bottom Line:

What SPY does Monday, Tuesday, and Wednesday is hard to predict. History leans towards positive returns, but the edge is not strong. With the S&P downgrade, all analysis of the past might be meaningless.

What stands out is recent performance. Looking at the last 15 or so occurrences, note how volatile the market has become after a surge in volume. I suspect that if I dug deeper we would see that many volume surges occur during bear markets or downtrends, where we would expect a great increase in volatility. Volume just doesn’t seem to surge near tops or during uptrends the way it does during a downtrend or bear market phase.

There is an edge though, but it doesn’t show up in the short-term. It is very obvious in an intermediate term analysis. The chart below was generated by assuming one bought SPY at the close when the volume surged to greater than 2.75x the 50 day average volume. No commissions or slippage were included, and all SPY history was used.

While we are living and trading during what seems to be an unprecedented time, in the past, large volume surges have led to a strong upside edge in the intermediate term.

It is important to remember that the chart above has combined all the trades to create an average. While the average is very bullish, we may find ourselves staring down a -4% to -8% move down over the next few days. I guess we should be optimistic and realize that we could also see a +5% upside move over the next few days. Since a bounce is due, I will go against my gut and lean towards the upside rather than more downside. Again, I’m using past data, absent an S&P downgrade of the credit rating of the United States of America.

Lastly, sustained bear markets are rare events. While they are few and far between, should the market be starting another bear phase, any bounce should be used to go to cash or initiate shorts.

Volume Surge Suggests Bottoming?

Last week, volume on SPY surged to 175% greater than the 50 day average volume. Does this surge in volume hint that a tradeable bottom is near?

On Wednesday, June 15th, SPY volume surged to more than 175% of the 50 day average and made a new 50 day low. On Thursday, volume again surged. When looking for bottoms, it helps to see capitulation. Volume surges coupled with new lows suggest that capitulation may be occurring.

The wild card, and the major caveat of any current SPY study is that it continues to close beneath its bottom Bollinger Band. Since the bottom band marks 2 standard deviations beneath SPY’s 50 day average, multiple closes beneath it signals that the market is abnormal. An abnormal market can stay abnormal longer than we would like. I have written previously about abnormal markets here. We really need multiple closes above the bottom band before this abnormality is removed. Once this happens, bottom-calling makes more sense, in my opinion.

Anyway, lets look at what the volume surge suggests.

The Rules:

  • When volume surges to more than 175% of the 50 day average volume, buy SPY at the close
  • Sell X days later
  • No commissions or slippage included
  • All SPY history used

The Results:

Summary of Results:

I added two other variables in order to more accurately model recent market action.

  1. The blue line is the basic setup where volume surges to 175% of the 50 day average volume
  2. The red line adds the factor of the new 50 day low
  3. The green line uses the other factors and adds the requirement of the last close beneath the lower Bollinger Band (50,2)

Sample sizes for these studies were acceptable with 271 occurrences of the basic setup (58 trades if the trade is held the full 50 days), and 59 occurrences of the added factor of the 50 day low (29 trades if the trade is held the full 50 days). Adding the final factor of the close beneath the bottom Bollinger Band reduces the number of occurrences to only 24 with only 14 trades if the trade is held the full 50 days.

Bottom Line: As noted above, SPY has got to quit closing below the bottom Bollinger Band. Until it doesn’t, we should expect that it will continue. If we ignore the additional factor of the close beneath the bottom band, it appears that the market may be bottoming. The red line is suggesting some consolidation over the next month. After about 25 days, consolidation has ended and over the next 25 days, SPY has climbed 3% on average.

Using a Volume Filter May Improve Short Trades

I was visiting David Varadi’s blog and came across his recent post about the importance of using volume exhaustion as a guide to shorting. With POMO and QE running roughshod over the backs of short-sellers, any little edge can help, and DV seems to be on to something. Here is the core of his idea:

Curiously, one of the filters that seems to improve entries considerably is the concept of volume exhaustion: when volume reaches a short-term high over the past week or two weeks on short-term market strength, it is likely that buying is close to some peak, and hence is exhausted.

I took his idea, and paired it with his trademark indicator, the DV2, or DVB, to see what would happen.

Here are the rules.¹ No commissions or slippage were included.

  • Go long at the close when DVB crosses beneath 20.
  • Go short at the close when DVB crosses above 80.

Then I add the volume filter, using the same short rule but requiring volume to be higher than an X day high in order to go short.

Results:

While requiring volume to be greater than a 10 day high in order to short did improve results significantly, I’m concerned that the sample size may be too small to draw any meaningful conclusions. It is hard to tell whether the filter has an edge in this scenario or whether it just limited the system to taking a few lucky shorts.

If nothing else, requiring a volume surge before getting short does certainly limit opportunity, and while The Ben Bernanke is in charge, limiting opportunities to get short is probably a wise decision.

I like DV’s idea and intend to explore it further in the future.

¹Often DV uses this indicator to go short above 50 and long beneath 50. I have altered these parameters a bit.

SPY Volume Study: Buying 20 Day Lows

For the kick-off post which covered buying SPY 20 day highs, go here…

I’m beginning to look at the influence of volume on price, starting with the SPY. I want to see what the influence is on the broader market before dialing it in to look at individual stocks.

Rules:

  1. Buy SPY at the close when it makes a 20 day low OR
  2. Buy SPY at the close when it makes a 20 day low with volume LESS than the 50 day average OR
  3. Buy SPY at the close when it makes a 20 day low with volume MORE than the 50 day average.
  4. Sell X days later at the close (up to 20 days later).

Results:

The reason buying 20 day lows with volume more than the 50 day average closely follows buying all 20 day lows (regardless of volume) is that most 20 day lows have come with volume greater than the 50 day average. This means that when a 20 day low is made, and volume is less than the 50 day average, it is a somewhat abnormal event.

Note that low volume doesn’t significantly affect returns until after the 6th day. It appears that when a 20 day low is made and there is some capitulation (with capitulation being volume running above average), the low is more likely to result in gains over the next 20 days. Conversely, new 20 day lows made on low volume have tended not to hold.

The question then is does this apply to individual stocks? If we are dip buying a new low, will we see better results if the low comes on higher than average volume? We’ll see…

More Post Crash Analysis: Examining Volume Surges

Friday’s volume surge was greater than 2.75 times the 50 day average volume. If we treat volume as an indicator, and ignore all other variables, what does a surge in volume portend for the short and intermediate terms?

First, since everyone is concerned with the next several days, let’s look at next day, two day, and three day returns. To be clear, I have calculated returns this way: Two day returns is the return on day two after the volume surge. It is NOT the return of the first AND second day after the volume surge. The same calculation is used for the three day return.

Next Day Return

Average Next Day Return = 0.17%

% of Winners = 42.31%

Second Day Returns

Average Second Day Return = -o.08%

% of Winners = 55.10%


Third Day Returns

Average Third Day Return = 0.14%

% of Winners = 54.35%

Bottom Line:

What SPY does Monday, Tuesday, and Wednesday is hard to predict. History leans towards positive returns, but the edge is not strong. With the S&P downgrade, all analysis of the past might be meaningless.

What stands out is recent performance. Looking at the last 15 or so occurrences, note how volatile the market has become after a surge in volume. I suspect that if I dug deeper we would see that many volume surges occur during bear markets or downtrends, where we would expect a great increase in volatility. Volume just doesn’t seem to surge near tops or during uptrends the way it does during a downtrend or bear market phase.

There is an edge though, but it doesn’t show up in the short-term. It is very obvious in an intermediate term analysis. The chart below was generated by assuming one bought SPY at the close when the volume surged to greater than 2.75x the 50 day average volume. No commissions or slippage were included, and all SPY history was used.

While we are living and trading during what seems to be an unprecedented time, in the past, large volume surges have led to a strong upside edge in the intermediate term.

It is important to remember that the chart above has combined all the trades to create an average. While the average is very bullish, we may find ourselves staring down a -4% to -8% move down over the next few days. I guess we should be optimistic and realize that we could also see a +5% upside move over the next few days. Since a bounce is due, I will go against my gut and lean towards the upside rather than more downside. Again, I’m using past data, absent an S&P downgrade of the credit rating of the United States of America.

Lastly, sustained bear markets are rare events. While they are few and far between, should the market be starting another bear phase, any bounce should be used to go to cash or initiate shorts.

Volume Surge Suggests Bottoming?

Last week, volume on SPY surged to 175% greater than the 50 day average volume. Does this surge in volume hint that a tradeable bottom is near?

On Wednesday, June 15th, SPY volume surged to more than 175% of the 50 day average and made a new 50 day low. On Thursday, volume again surged. When looking for bottoms, it helps to see capitulation. Volume surges coupled with new lows suggest that capitulation may be occurring.

The wild card, and the major caveat of any current SPY study is that it continues to close beneath its bottom Bollinger Band. Since the bottom band marks 2 standard deviations beneath SPY’s 50 day average, multiple closes beneath it signals that the market is abnormal. An abnormal market can stay abnormal longer than we would like. I have written previously about abnormal markets here. We really need multiple closes above the bottom band before this abnormality is removed. Once this happens, bottom-calling makes more sense, in my opinion.

Anyway, lets look at what the volume surge suggests.

The Rules:

  • When volume surges to more than 175% of the 50 day average volume, buy SPY at the close
  • Sell X days later
  • No commissions or slippage included
  • All SPY history used

The Results:

Summary of Results:

I added two other variables in order to more accurately model recent market action.

  1. The blue line is the basic setup where volume surges to 175% of the 50 day average volume
  2. The red line adds the factor of the new 50 day low
  3. The green line uses the other factors and adds the requirement of the last close beneath the lower Bollinger Band (50,2)

Sample sizes for these studies were acceptable with 271 occurrences of the basic setup (58 trades if the trade is held the full 50 days), and 59 occurrences of the added factor of the 50 day low (29 trades if the trade is held the full 50 days). Adding the final factor of the close beneath the bottom Bollinger Band reduces the number of occurrences to only 24 with only 14 trades if the trade is held the full 50 days.

Bottom Line: As noted above, SPY has got to quit closing below the bottom Bollinger Band. Until it doesn’t, we should expect that it will continue. If we ignore the additional factor of the close beneath the bottom band, it appears that the market may be bottoming. The red line is suggesting some consolidation over the next month. After about 25 days, consolidation has ended and over the next 25 days, SPY has climbed 3% on average.

Using a Volume Filter May Improve Short Trades

I was visiting David Varadi’s blog and came across his recent post about the importance of using volume exhaustion as a guide to shorting. With POMO and QE running roughshod over the backs of short-sellers, any little edge can help, and DV seems to be on to something. Here is the core of his idea:

Curiously, one of the filters that seems to improve entries considerably is the concept of volume exhaustion: when volume reaches a short-term high over the past week or two weeks on short-term market strength, it is likely that buying is close to some peak, and hence is exhausted.

I took his idea, and paired it with his trademark indicator, the DV2, or DVB, to see what would happen.

Here are the rules.¹ No commissions or slippage were included.

  • Go long at the close when DVB crosses beneath 20.
  • Go short at the close when DVB crosses above 80.

Then I add the volume filter, using the same short rule but requiring volume to be higher than an X day high in order to go short.

Results:

While requiring volume to be greater than a 10 day high in order to short did improve results significantly, I’m concerned that the sample size may be too small to draw any meaningful conclusions. It is hard to tell whether the filter has an edge in this scenario or whether it just limited the system to taking a few lucky shorts.

If nothing else, requiring a volume surge before getting short does certainly limit opportunity, and while The Ben Bernanke is in charge, limiting opportunities to get short is probably a wise decision.

I like DV’s idea and intend to explore it further in the future.

¹Often DV uses this indicator to go short above 50 and long beneath 50. I have altered these parameters a bit.

SPY Volume Study: Buying 20 Day Lows

For the kick-off post which covered buying SPY 20 day highs, go here…

I’m beginning to look at the influence of volume on price, starting with the SPY. I want to see what the influence is on the broader market before dialing it in to look at individual stocks.

Rules:

  1. Buy SPY at the close when it makes a 20 day low OR
  2. Buy SPY at the close when it makes a 20 day low with volume LESS than the 50 day average OR
  3. Buy SPY at the close when it makes a 20 day low with volume MORE than the 50 day average.
  4. Sell X days later at the close (up to 20 days later).

Results:

The reason buying 20 day lows with volume more than the 50 day average closely follows buying all 20 day lows (regardless of volume) is that most 20 day lows have come with volume greater than the 50 day average. This means that when a 20 day low is made, and volume is less than the 50 day average, it is a somewhat abnormal event.

Note that low volume doesn’t significantly affect returns until after the 6th day. It appears that when a 20 day low is made and there is some capitulation (with capitulation being volume running above average), the low is more likely to result in gains over the next 20 days. Conversely, new 20 day lows made on low volume have tended not to hold.

The question then is does this apply to individual stocks? If we are dip buying a new low, will we see better results if the low comes on higher than average volume? We’ll see…

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