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Our critical day analysis is all about trend reversals. We tell you when there is a high potential for a reversal of the short trend and we've been doing it since 1994 with an 80%* accuracy. |
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Volume Volume is a measure of supply and demand that is independent of price. It is often looked at for confirming evidence of price trend and price reversal patterns. For patterns such as triangles that are the product of a period of indecision or consolidation in stock price, volume is usually light during the formation of the pattern and increases on a breakout from the pattern. For any pattern or trendline penetration, a breakout with increasing volume is more an indication that prices will continue in the direction of the breakout than a breakout on low volume. A healthy trend can be defined as a period of rising peaks and rising troughs in price and increasing volume. When volume diverges from price where price is in an up trend but volume is declining it can mean that there is a higher risk of price trend reversal. In the later part of a rising trend, price may still be fueled by late comers to the market during a period when there is an absence of selling pressure which would produce a lower volume but rising price trend. When volume begins to increase, it helps to identify the relative enthusiasm of buyers and sellers and direction of the price trend. Daily volume is highly volatile and should be "smoothed" with a moving average or used in an indicator to help identify the trend in volume. When the trend of price and volume move in the same direction, it is an indication of healthy underlying fundamentals. Falling price accompanied by falling volume speaks of a lower relative enthusiasm to sell. Rising price with rising volume is bullish. When volume and price diverge, it warns of potential weakness in underlying fundamentals. When price trend is rising but the trend in volume is falling, it warns of a potential price trend reversal. When price trend is falling and volume is rising, it is an indication that sellers are becoming enthusiastic to unload the security and is bearish but also may be pointing to the nearing of capitulation or exhaustion selling. It is best to wait for evidence in price in judging the significance of any price trend reversal indications.
There are a number of special circumstances that occur with regard to the relationship between price and volume. One such circumstance is a very high volume day after a major decline in prices. This can give indication that a bottom for prices has been reached and is often referred to as a "selling climax". One caution is that it may only indicate that a temporary bottom has occurred, after which price consolidates or trades in a range for a period of time before continuing the falling price trend. Another circumstance is the expansion of volume during a consolidation period after a major price peak. This is an indication of a divergence as price has fallen from the peak and yet volume is expanding. A divergence can warn of potential reversal of the price trend. When anticipating a price trend reversal, it is wise to build a wide body of evidence to support the expectation and to wait for price confirmation of a reversal in price trend. When price goes to a new high on increased volume, traders often compare volume with that which occurred during previous rally's in prices. If the current volume is less than than the previous rally's volume, there is a potential for a price trend reversal. A rally with declining volume is suspect. During the formation of various price patterns such as the Head and Shoulders pattern or the double top or double bottom pattern, generally high volume at the start of the pattern declines during the formation of the pattern. This warns of a potential reversal in prices. Intra-day analysis where sharp price changes occur on high volume in a short period of time can sometimes be attributed to program trading. Program trading is the simultaneous purchase or sale of a basket of stocks (generally 15 or more stocks) with a total value of $1 million or more. This is an indication of strategy for portfolio managers and large demand and supply forces but does not always give straight forward assessment of trading bias. Due to the use of futures, and other derivatives, a sell program for a basket of stocks may be part of a bullish strategy rather than bearish. There are a number of volume indicators that have been created to help analyze volume. On Balance Volume was introduced by Joseph Granville and is a cumulative running total of volume. When price closes up on the day, the daily volume is added to the running total of volume. When price closes down on the day, the daily volume is subtracted from the running total of volume. On Balance volume (OBV) can give an indication of the health of a price trend. Rising OBV during a period of rising prices is bullish. Falling OBV during a period of falling prices is bearish. As with most indicators, divergences can indicate there is a weakness in the underlying fundamentals of price. Rising OBV during a period of falling prices may indicate the possibility of a trend reversal and a rising price trend in the future. Falling OBV and a rising price trend may indicate a controlled exodus from the stock as there is a greater net volume for the stock on days when price falls. A number of other indicators and volume gauges exist and should be reviewed for potential use in building a body of evidence prior to a trade. It is important to determine the value of the method both on the security in question and across a wider body of securities. Some trading volume gauges include the low-price activity ratio which is a comparison of the volume of high risk speculative stocks to blue chips. Another volume gauge is the net member buy/sell ratio which compares the volume of shares purchased to the volume of shares sold by members of the stock exchange. The odd-lot theory claims that the ratio of odd lot purchases to odd lot sales gives indication of the uninformed investor and is used as a contrary indicator. Other indicators include the Volume Rate of Change, Volume Oscillator and Positive Volume Index. To the right technical studies are examined in more detail to provide a sense of conformational evidence for traders of the critical day. Click on any of the terms to take a closer look at a technical discussion on that topic. All formations, patterns, indicators and technical tools fail at various times and so should only be used to build a body of evidence in forming a trading decision rather than being solely relied upon. There are a number of valuable studies that lead to intuitive understandings about price and volume but a strong compliment to technical analysis is an understanding of the trends and changes in the fundamentals and economic activity that ultimately lead valuation levels in the markets. Walk through a critical day
A closer view of the most recent signals. You can see the short trend immediately prior to a successful critical day, reverses coming away from the critical day. Often a failed critical day will indicate a stronger bias in the market for continuation of the trend that was in place prior to the critical day. A failed signal can therefore provide as much information and opportunity as a successful one. Take a look at tech studies to develop a sense of trend reversals and use. |
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