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 Selling Volume) and volume that is generated
as the index pushes lower (which we call Buying 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 buying surges (which occur as the price / index moves down), as
well as of selling 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 selling volume has
exceeded the generation of buying volume by more than 66% (in this case, the SBV
indicator will be red). Conversely, when the SBV oscillator declines below a
reading of -66% (the SBV indicator is now green), it implies that the production
of buying volume exceeds that of selling 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.
