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Avoid over-interpretation of intraday volume trends. Sixty percent or more of total daily participation occurs during the first and last hoursCONGESTION AND VOLUME New students of technical analysis expect to memorize well-known patterns and book quick profits when they locate them on their favorite stock charts. But flag and triangle formations don’t fill wallets without considerable effort. Successful swing traders must study the chaotic swings within each congestion pattern to predict both direction and timing for the eventual breakout. Volume characteristics change as markets swing between negative and positive feedback. Negative feedback generates much less interest from the crowd. These rangebound periods absorb recent price change volatility and prepare for new thrusting movement. Investors and traders take profits during these quiet conditions in an orderly manner that lowers the emotional fire that induces volume spikes. Study histograms to reveal whether bulls or bears win small battles within a developing pattern. Profitable breakouts depend on accurate interpretation of these shifting crowd emotions. Short-term bursts of acc-dis within the confines of a constricted range often expose the underlying market tendency and required time for positive feedback to appear. Compare the small peaks of buying and selling pressure within the swings of the congestion pattern. When volume increases on short rallies and declines on dips, expect the bull’s successful outcome. Alternatively, a series of lower bars with increasing volume reveals fear and often signals an eventual breakdown. But regardless of direction, expect volume to decline overall as a new pattern draws to a conclusion. Volume should taper off and dry up as negative feedback builds. A trendline drawn above the volume histogram will downslope to reflect this declining con dition. Near the end of range development, price and volume synchronize at the empty zone, that quiet terminus between negative and positive feedback. Participation reaches its nadir as the crowd turns away in boredom within this neutral interface. Watch closely from this center of apathy for evidence of the awakening trend. Use subsequent volume as one measure to locate an impending setup. When properly identified, participation on subsequent bars provides valuable feedback on the direction and strength for the impending move. For example, false breakout odds increase if price surges out of an apex without sufficient volume. The crowd builds trend through volume. Hidden battles take place during negative feedback that impact the eventual market direction. Positions square out and a bias emerges that supports or diverges from the recent trend. Swing traders seek to uncover this prejudice through analysis of rangebound price bars. Begin by asking several important questions, as given in Table 3.2. INTRADAY TRADING VOLUME Avoid over-interpretation of intraday volume trends. Sixty percent or more of total daily participation occurs during the first and last hours. Swing traders design signals to trigger during favorable volume, but this intraday bias distorts output that applies to very short time frames. Limit most intraday examination to histograms. Also consider eliminating lower-pane volume indicators to focus attention on the time and sales ticker. This real-time oscillator provides all the crowd information needed to execute successfully within very short-term holding periods. Range conditions generate small-scale trading patterns. Evaluate volume spikes as a stock swings back and forth to reveal small bursts of greed or fear within the crowd. One of these emotional forces will eventually ignite to ramp price toward the next level. Is there a failed rally just outside congestion on higher volume than the rest of the range? Insiders often gun the buy stops to take out that side of the market. This reveals a bias toward taking the market down. Is there a failed breakdown just outside congestion on higher volume than the rest of the range? Insiders often gun the sell stops to take out that side of the market. This reveals a bias toward taking the market up. Do higher-volume days occur on narrow range or wide range bars and do bull or bears win these days? Higher volume on wide bars suggests the market being pushed to generate transactions. Higher volume on narrow bars suggests accumulation or distribution that depends on the outcome of the bar. Does a silent alarm signal appear? Certain volume events within ranges overcome all prior activity. Market character immediately changes when a massive volume day shows up. Routine intraday volume consistently displays a high noise-to-signal ratio for all but the most liquid stocks. Intermittent peaks and valleys on 5-minute histograms contain few predictive properties and fail badly when block trades pass through the system. These institutional blocks distort the trading picture since large transactions often scroll well after the actual execution takes place. Noise decreases as liquidity increases. For example, the technology behemoths generate unique intraday volume properties as a massive crowd generates a virtual index market. Sufficient participation within each tick allows fluid data measurement and accurate price forecasting. The best volume signals in this liquid environment come at short-term tops or bottoms. Histogram spikes that converge with clear reversal bars trade as reliably as those that print on a daily or weekly chart. Effective intraday trading studies the short-term impact of volume characteristics on the daily chart. This data identifies markets that are ripe for new opportunities as well as those best avoided. As current market price approaches past high-volume battle zones, intraday traders can expect a repeat performance. This advance warning allows them to watch specific markets for signs of increased volatility. Daily histograms also pinpoint developing breakouts and runaway trend moves that mark the most profitable of all intraday setups. Many stocks become good intraday trading vehicles under the right circumstances. Sudden news events, warnings, or alliances can evoke several days of high-volume activity on relatively thin issues. Spreads narrow sharply as participants jump in and out of these temporary profit vehicles. Use watch list filters or online stock sites nightly to uncover and capitalize upon these temporary gems. SILENT ALARM A hidden market hotspot triggers the silent alarm (SA). This unusual zone reflects intense crossroads of buying and selling pressure. Emotional participation swells volume in a single bar, but a painful standoff develops between bulls and bears. Price sits still as friction reaches a boiling point. Swing traders who recognize the developing SA stand aside but then take positions in whatever direction that price finally ejects out of that bar’s range. Short-term volume may issue a powerful signal under special circumstances. The SA rarely occurs but flags a significant profit opportunity. The alarm sounds when price action meets three conditions: • Volume exceeds 3 times to 5 times the average 50-60 bar VMA. • Price bar range measures below the average of the last 7 bars. • The price bar sits within congestion not broken by the volume event. Alarms should not print a breakout through S/R. Price must remain trapped when the dust settles on that bar’s activity. Verify prior emotional trading at the same price level through TM investigation. Also make certain the high volume doesn’t reflect a prescheduled transaction such as a secondary offering. READING THE CROWD Volume breathes differently than price. Narrow action may yield sharp emotional behavior or an unexpected lack of participation. Each outcome carries different consequences for swing traders. This crowd-measurement tool works well on daily charts but consistently undermines intraday signals. It offers both early warnings and dead ends, often at the same time. Volume reflects a crowd psychosis that often makes little sense in the short term but turns highly predictable at key intersections of trend and time. Successful swing trading requires skillful interpretation of the herd mentality that drives price change. Develop a seasoned understanding of volume’s impact on the stock chart. Learn when to use it and how to ignore it when required. Always pay close attention to the evolution of crowd participation as well as the peaks and valleys. This often provides the clearest signals for major reversals and impending breakouts. Opportunity arises from recognition of key volume events and correct interpretation of the odd crowd tension that builds around breakout and breakdown levels. Invoke both left- and right-brain functions to measure this complex struggle. Human nature channels greed and fear between stable boundaries most of the time. But the speculator’s pocketbook depends upon those rare moments when crowd forces get thrown out of balance. Many elements of the charting landscape read the emotional crowd and try to predict its next move. Volume addresses this difficult task better than any other tool. But keep in mind that profits depend on price change alone. Realize that price itself offers the best leading indicator for price change throughout the Pattern Cycle. As it rises, it predicts that further gains will follow. As it falls, odds increase that it will fall even further. BEAR MARKETS Modern participants have rarely faced severe bear market conditions. Most players wrongly believe that profits will continue even in a major decline as long as they just flip their long strategies upside down. But worldwide bear markets present difficult conditions for most short-side participants. Trend-following tactics often fail as sudden squeezes offer no escape and induce heavy losses. A special personality marks each secular bear market. Inflation or oil prices may drive some while overheated economics or asset overvaluation awakens others. But bear markets all display one common characteristic: they make it much harder to turn short-term profits than typical bull markets. Swing traders should prepare for the next downturn now so that they can survive and profit while waiting for better conditions. Pattern Cycles suggest effective short sale tactics during individual stock bear markets. But volume drops sharply through most phases of a broad worldwide bear depression. This induces illiquidity and dangerous trading conditions. Spreads widen and slippage increases for both entries and exits. Opportunities vanish as good short sale inventories dry up at many broker-dealers. Reliable information disappears and good sources close up shop due to a lack of interest. Bear markets appear through many time frames. They can represent grand bear markets, cyclical bear markets, intermediate-term corrections, or minor down-swings. Minor downtrends can last a few minutes or days. Longer ones may persist for several months. Grand bear markets can span decades and embed multiple cyclical bull-bear swings. These cyclical swings pose the greatest threat for modern swing traders. Historically this particular bull-bear cycle lasts about four years, with 25% (or one year) of that time spent in active bear conditions. Bears shake out the market infrastructure and realign prevailing psychology. The actual price decline often takes up only a small percentage of the time that downtrend conditions persist. As with stocks, indices fall faster than they rise and the selling spasms tend to end quickly. The rest of the time the market meanders back and forth on low volume while it tries to heal. This offers another clue why trading during these times can be very difficult. The typical bear market doesn’t end in the high-volume capitulation that marked volatile corrections in the 1990s. It slowly heals as value investors start to move back into positions. Many other participants will have little interest in the markets by that time. The financial media condition traders and investors to believe that a simple 20% retracement off the index highs constitutes an active bear market. This comforts many participants, the small drop in their portfolios giving them battle credentials. But technical and psychological damage mark bear conditions with far greater accuracy than flat percentages. This type of pain has rarely been experienced over the past two decades. A bear market corrects the excesses of a specific market uptrend. It retraces according to classic Fibonacci mathematics. When the prior rally displays a moderate advance, the bear market may not need a great pullback to correct the imbalance. But when market rallies extend to historical levels, conditions favor a very deep pullback that may take several years of basing before a new and sustainable rally can begin. Swing traders should act defensively through cyclical bear market conditions unless the intraday charts signal opportunity. Rallies and selloffs that print at that level provide excellent short-term setups. Tighten the holding period and step into as many positions as the temporary market environment allows. Try to anticipate where short covering rallies will likely erupt. Get in along with the insiders and use the short seller’s panic to turn a profit. Then find natural reversal levels and flip over to the short side after the squeeze completes. Follow the daily chart for key turning points but avoid being tossed around by the frequent tests of investor hope and fear. Cyclical bear markets print according to the same mechanics as individual stocks and futures. Look for a double bottom or the Big W to signal the end of a major selloff. These emotional periods offer excellent longer-term profit for those with precise market timing. But as with other falling knives, entry requires execution against popular sentiment. Watch the technicals closely and act when cross-verification opens up the next bull phase. |
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