BarroMetrics Views: Volume

Paul wrote: “Increasing volume means increasing equal number of sellers & buyers (bear & bull).

If the bull trend is “so obvious”, there will be decreasing number of people wanting to sell, though there is an increasing number of people wanting to buy.

The result will be: decreased volume?!”

I view the market as a dual auction process that uses prices to advertise opportunity. Let’s give an example to show what I mean:

Buyers       Price    Sellers

50             1299      20

25             1300      22

0               1301      0  Current price level

22            1302      25

20           1303      50

Prices are the result of buyers and sellers agreeing to transact at a certain level. In this example the most recent transaction has left a vacuum in that it has cleared all supply and demand at 1301. Now the buyers have a choice to pay up to the sellers.

Let’s say buyers pay up to 1302. We see price advance by $1.00; but, if the offer volume remains at 25, then the price movement will stall since there is additional supply of  3 to satisfy.  So at 1302, the sellers at 1302 face a choice of selling down or not selling their goods. If the demand at 1301 remains at 0, prices will have to move down to 1300 and so on.

Here’s what I see as the issue with Paul’s comment. If there are increasing numbers of buyers and decreasing number of sellers, what should happen to the daily ranges? Right! They should increase because the additional buying demand will keep pushing prices up until a level is found that attracts the sellers.

In Pete Steidlmayers words: “The function of markets is to facilitate trade”  i.e. go to level where the opportunities for trade are maximised. This maximisation is reflected by the volume and range of any given day.

Right now the S&P is moving up on greatly reduced volume and range. That suggests that although demand exceeds supply, the demand is not strong. Under those conditions, when demand meets an increased supply, we should see a tumble.  That’s why I see a market that is moving directionally on below normal volume as a high risk long.