BarroMetrics Views: Volume, Context, and the S&P

My approach to the markets is based on the works of Wyckoff (whose work Pete Steidlmayer took to a whole new level) and R N Elliot:

  1. The Wyckoff portion found expression in that body of my  work I call BarroMetrics,
  2. Pete’s work I allot to Market Profile. I am probably one of the few who  have followed his work from the traditional Market 30-minute Profiles, to what was originally called the Steidlmayer Distrubution. I stopped updating my Profile knowledge when Pete went to the CapFlow software.
  3. The R. N. Elliott material is given voice in the Ray Wave - the only objective wave theory I have seen.

Through it all, a number of principles hold true:

  • The structure of the market defines the price action and what we term as normal; and,
  • Volume and range provide vital clues to  answering the question: is the current action likely to continue or change.

Figure 1 shows a Normalized Volume of the Weekly S&P. The declining volume from March 16 had the market headed higher suggesting  a substantial down move would follow the end of the up move. The surge of volume on May 4 suggested a buying climax.

Figure 2 shows the daily Normalised Volume of the S&P. The large range day  on May 4 did not show commensurate volume. The price action in the mauve rectangle (May 6, 7 and 8 ) shows a topping pattern and topping volume. The price action on the up day of May 18 shows the Last Point Supply: a strong up day with almost no volume.

The reversal day May 20 (at the Primary Sell Zone) was preliminary confirmation of weakness; as a final confirmation, I want to see a bearish-conviction bar (close no higher than bottom third of a day’s range, open no lower than top third of day’s range on normal range and volume).

I set out the time and price zone components in my monthly videos.

It’s important to understand that had I seen the reversal signal without the context in which it appeared (zone, previous volume configuration etc), I probably would not have placed as much of an emphasis as I have. As it stands, I believe the probabilities favour the start of a correction that will take the S&P (basis cash) to 785 to 639. The preferred target is around 732. This assumes the S&P will not make new lows.

One of the burning questions  at the moment is whether the rally from 666 to 930 was the first leg of move that will:

  • see a return to the 12- Month Primary Sell Zone 1576 to 1461 or
  • whether it was merely a bear market rally - which means we’ll see lows below 666.

I’ll assess this tomorrow.

2009-05-25-spw-mkt-vol.jpg

FIGURE 1 Weekly Normalised Volume

2009-05-25-spd-mkt-vol.jpg

FIGURE 2 Daily Normalised Volume

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