Technical Analysis, Studies, Indicators:
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Significant volume surges on an index are an indication that a large number of contracts / shares are changing hands. Such volume surges reflect a change in market sentiment, and they frequently presage at least a short-term price reversal.
Our SBV (Selling-Buying Volume) oscillator can help you define critical levels at which trend reversals are most likely to occur. The SBV oscillator calculates the difference between volume that is generated as the index advances (which we call Buying Volume) and volume that is generated as the index pushes lower (which we call Selling Volume). We have made this indicator more precise and easier to use by applying it to our modulated combined volume charts. This allows you to analyze and compare the SBV indicator over an entire session and spot those volume surges that are not simply part of typical diurnal variations.
Chart 1: S&P 500. SBV Oscillator Chart. 15-day View.
The SBV oscillator reflects the magnitude and duration of selling surges (which occur as the price / index moves down), as well as of buying surges (which are created as the price / index moves up). When the SBV oscillator exceeds a certain level a reading of 66% in this particular example - it reveals that the production of buying volume has exceeded the generation of Selling volume by more than 66% (in this case, the SBV indicator will be green). Conversely, when the SBV oscillator declines below a reading of -66% (the SBV indicator is now red), it implies that the production of selling volume exceeds that of buying volume by more than 66%.
You can use the SBV oscillator to build a rudimentary trading system:
- Buy on selling surges, and
- Sell on buying surges.
To trade this simple system, set your own critical SBV levels at which the opening and closing of trades will be triggered. A trading system based on the SBV oscillator will however deliver much better returns when trading decisions are not triggered by the index simply reaching a critical SBV threshold, but rather by it reaching such a level, trading beyond it, and then retracing back to the critical threshold level.
By Victor Kalitowski for MarketVolume.com
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