S&P
500:
Examples of a Mid-Term Trades
We define a mid-term trend as a general market trend that usually
persists from several weeks to several months.
The following example illustrates the basic principles behind our
MarketVolume® analysis. Chart 1 shows the relationship between index levels
and the volume moving average (VMA) over the short-term.
|
Chart 1. |
Relationship between volume moving average (VMA) surges and
index reversal points. S&P 500 index. February - July 2005. |
 |
The blue line in Chart 1 is a trend line for the fast volume
moving average (VMA). The green line symbolizes the slow volume moving average.
The chart above shows the relationship between index levels and volume patterns
over the mid-term. When you see the fast VMA cross the slow VMA from below, this
indicates a VMA surge. The larger the difference between the fast and the slow
VMAs, the more extensive the volume surge (we speak of a greater "magnitude").
The longer the fast VMA stays above the slow VMA, the greater the duration of a
VMA surge. Surges in the volume moving average subsequently affect index price
movements, frequently leading to index reversals. Generally, we note that the
bigger the magnitude of a volume surge, and the longer its duration, the
stronger the ensuing index reversal movement will be.
On Chart 1, note the volume surges at points A
and B, characterized by the fast 2-day VMA crossing the slow 60-day
VMA from below. On April 15, the value of the 2-day VMA exceeded the 60-day VMA
by 31.8% (click
HERE to calculate the magnitude of VMA surges). This very pronounced volume
surge with its prolonged duration prompted an index reversal over the mid-term.
The last time such a strong volume surge was seen was on December 12, 2004 (click
here to find historical VMA surges). After a significant volume
surge in December 2005, the market reversed its mid-term uptrend to a downtrend.
The move lower terminated with a similarly very strong VMA surge in
April 2005 (Points A and B).
In Table 1 below, we have listed the hypothetical returns that
could have been achieved by buying the index at points A B and selling at the VMA surge encountered at point C.
| Table #1.
|
Extent of the mid-term uptrend
between two volume surges |
|
Trading Vehicle |
Returns |
 |
|
| NASDAQ 100, QQQQ |
about 12% |
| S&P 500, SPY |
about 7% |
| DJI, DIA |
about 5% |
|
Our research shows that surges in the VMA subsequently affect
price (index level) movements, frequently prompting an index to reverse its
direction. In Chart 1 above, note how the S&P 500 index rallied after a volume
surge occurred at points A and B.
Questions and answers about volume surges:
Could I apply the numbers you presented above (to
calculate the magnitude of volume surges) and use this information to
develop a trading system? For instance, could I initiate a mid-term trade
once I see a surge in the 2-day VMA that protrudes 31% above the 60-day VMA?
While the specific numbers used above serve only as an example, it might be
feasible for you to develop your own trading system based on two VMA
settings. For instance, you might wish to experiment with a fast 1-day VMA
and a slow 10-day VMA, or with any other setting, as appropriate to your
personal trading style. (Click
here to read more)
| Disclaimer: The chart
example is intended for educational purposes only - it does not
constitute trading advice, nor does it make or imply any market trend
predictions. |
|
