» Volume, Context and the S&P II Blog for Trading Success: Ray Barros

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

(All figures today are basis cash S&P)

Today we’ll consider the probabilities of the rally from the March lows to date ; the first leg of a move to the Primary Sell Zone (1576 to 1461) or whether the move was merely a rally in bear market. The latter suggests new lows below 666. In short it’s the question that has been asked since the Upthrust Sell Signal on Oct 19 2007: will the US stocks follow the path of 1966 to 1982 or 1929 to 1942 (Figure 1)?

For the most part, the camps have fallen neatly into two categories:

Those that consider only the extent of the rally and its accompanying momentum (e.g, GannGlobal); and
Those that measure the rally against a model (e.g. Lowry Research)

Without a doubt, the rally off 666 has been impressive: to date we have seen a 34.5% increase. More importantly, the rally momentum (price/bars) is the second highest in my data base. For this reason, many are calling the 666 as the bottom of the bear market.

On the other hand, those with a model are saying that despite the extent of the rally, the internals of the rally (volume, advance decline etc) when compared to the model show that this is probably a bear market rally.

Where do I stand?

I take a simple view to my technical trading: a trend is in place until we see evidence to the contrary. In the S&P we have a 12-month (yearly) swing, Upthrust Change in Trend Pattern partially confirmed by a breach of the 2002 lows (768). We have yet to see a Whole Point Count (see Nature of Trends); so, a bullish conviction close above the Primary Buy Zone, 894, would augur a move to the Primary Sell Zone 1576 to 1461.

Currently the monthly bar looks weak. The ATR is below normal and the bar is taking the shape of a small range neutral bar. If the bar looks the same by the end of May, this would be a bearish signal for me and I would classify the rally as a bearish one. This suggests a 1929 type scenario with new lows below 666 to come.

On the other hand, it’s only May 26 and much can happen in 5 days. If we can extend the range and have a daily bullish close above the prior 18-day swing high (monthly trend), the pendulum would swing the other way: we’d have a bullish monthly close that suggests a move to 1576 to 1461 - a 1966 to 1982 type pattern.

So, we’ll need to consider the 18-day structure to determine the question. I did this yesterday. That suggests a down move to come. This leans to the May bar being bearish if the down move starts before the end of the month. Whenever this down move begins, its volume and range will give a confirmation of the nature of the March rally.

An Aside

Figure 2 shows two ATR time zones. The first is March 2000 to August 2008. The other is Sept 2008 to April 2009. I am using the latter but keeping an eye on the current monthly ranges in case volatility switches back to more normal levels. The May bar is below average even if we use the March 2000 to August 2008 calculation.
Figure 3 illustrates the DJIA 1929 to 1942 and 1966 to 1982 scenarios.