In relation to last night’s post, Manish first asked: “Which volume number should one use?”

I use the average volume contained in a swing. But before I discuss that idea, we need to address the second question: what data source do I use? To answer that question we first need to understand the impact of the quarterly futures roll on volume.

Figure 1 shows CSI’s Perpetual contract for the S&P Futures. Notice how the volume peaks at roll-over and declines and starts the process all over again. This ‘roll-volume’ affects the volume in the cash because the US market is relatively efficient; consequently, there is some relationship between cash and futures volumes during futures roll-over.

FIGURE 1 CSI S&P Perpetual

Figure 2 shows the Cash S&P for the same period as Figure 1.

FIGURE 2 Cash S&P

I prefer to use normalized volume i.e. volume that identifies ‘normal’ volume for a period and then is used as a reference to plot ‘today’s   volume ‘. The best service for the US Stock Markets is Market Volume (http://www.marketvolume.com/). Figure 3 shows Market Volume for the same period as Figures 1 and 2. (Yes, the service includes intra-day volume).

FIGURE 3 Normalized S&P Volume

For other futures markets I use software I had written for me to produce normalized volume.

(My program is not commercially available. However, a STC student, Kym Haines <khaines@bigpond.com>, created a program that takes a data base in ASCII format of normal contracts and converts the contracts into one with ‘normalized’ volume. This is an excellent program. I subjected it to rigorous testing and the results produced were robust.

Kym made if freely available to STCers; I don’t know if he will sell it. If you are interested in buying, you can always ask him).

So for cash indices, I use normalized volume of the share volume transacted at the exchange; for futures contracts I use normalized volume derived from CSI’s data. As we may expect, the futures contracts provide a much greater contrast between normalized volume and that reported by the exchanges.

Now that I have answered that question, let’s turn to ‘average volume’. All I do here is average the volume in the data set I want to measure. Market-Analyst (http://www.market-analyst.com/) has a tool, ‘the probability box’, that does this automatically for me over the range I choose.

Finally as far as Open Interest is concerned, I use it in COT data format. For this I rely on COT services produced by Floyd Upperman (http://www.floydupperman.com/) and Steve Briese (http://www.insidercapital.com/) [The service is called: Bullish Review of Commodity Insiders]. Note that Steve has 2 other advisory services - Insider Futures and Insider Currencies. I don’t use these.

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