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As the new week unfolds in Australia off the back off the 3rd largest “up” week in the Dow Jones history the cynic in me always has to think this is the next part of the dead cat bounce or the real deal.
Once key criteria is volume as it shows in relative terms how well the price action has been supported. Taking the tale of two markets the Dow Jones and the local index SPI200 we have two charts we can look at for a guide to volume: the cash chart and the futures chart. These charts whilst they look similar and should do so, the shift in volume can be seen in the charts differently. If volume is rising in the cash market this means that physical share transactions are on the rise, if the volume increases in the futures area this is an increase in the speculative and hedging side of markets. It is often said the futures market leads the cash market around due to its forward thinking bias and also the nature of its participants.
The futures players are by rights more sophisticated but I use that term loosely and can be a good barometer to how the educated money is thinking around tops and bottoms. There has been definite hesitance on the current bounce as those who have been burned trying to pick bottoms are waiting for the confirmation before they race in again.
In the chart below I have used a split screen from ProfitSource to illustrate the point. The Dow Jones Cash and futures markets have seen huge price movement but in the last few days have seen volumes plateau in the cash market (not such a bad thing) followed by the futures volume falling away considerably.
click chart to enlarge
The Australian market volume patterns do read more convincingly with a volume spike for the 16th March and continued high volumes for the cash market. So does this mean we have found bottom? I have some cautious optimism with the middle of March always being an important area to watch based on Gann’s time frame analysis.
For me the real test will come on volume when the first higher bottom on the swing chart is up for grabs and if this is supported heavily in terms of volume we may see some respite in the near term. Let me say though with a broader view out to say 12-18 months we could still see lower prices and further risks to the downside.
Aaron Lynch
Good Trading
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