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Good morning, fellow MSers,
As many of you can gather from my occasional posts of the NYSE Composite
Index with official exhange advancing-declining volume data, yesterday
being the most recent one, I feel that price should be evaluated in the
context of volume information. Price alone tells only half the story, maybe
even less than half the story. This belief of mine leads to the next few
comments.
How can I understand the affect of volume on individual stocks, which are
my primary trading devices? Only occasionally do I trade the indexes in the
form of SPDRs, such as DIA, SPY, MDY, QQQ, and XLK. But everything I do
trade has volume, and yet there is no official source for how much volume
involved declining price trades and how much involved rising price trades.
By looking at Time and Sales data, one can make an approximation of how to
distribute volume between advancing, declining, and unchanged trades, BUT
there is no historical source of time and sales data from the exchanges,
yet alone for indiviual equities.
I would like to approximate this allocation if I want to attempt to
meaningfully use volume in conjunction with price data. Other technical
analysts have preceded me on this issue. Joseph Granville created the OBV
(On Balance Volume) some time ago, but it crudely approximates what I am
looking for because it considers ALL daily volume of a stock that closes up
on the day to be advancing volume, and all daily volume of a stock that
closes down on the day to be declining volume. Very crude, indeed. OBV is
available in Metastock, and there is another indicator called
ACCUMULATION/DISTRIBUTION which MS includes. This indicator makes a better
effort by allocating volume between advancing and declining varieties
according to the following formula:
the cumulative sum of [ { ( (close-low) - (high-close) ) / (high - low) }
* daily volume ]
It is a definite improvement of the OBV indicator, and yet it does not
satisfy me completely. I don't like its allocation formula in numerous
situations.
What I think is important about price pattern is influenced by Japanese
Candlestick theory. That is to say, I believe that where a stock opens,
trades to a high price and low price for the day, and then closes somewhere
within that context, it is that "picture" which I believe is very
revealing. The MS ACCUM-DIST indicator allocates volume according to HIGH,
LOW, and CLOSE information, but not consider the importance of the OPEN.
I have "created" (only because I am unaware of someone else of having
devised the formula that I am using) what I call the Cumulative Allocated
Volume Indicator, which in the Japanese Candlestick sense of things
examines the body (the range between the open and closing price) in the
specific context of the embodying "stick" (the range between the high and
low price). By prorating the daily volume to advancing, declining, and
unchanged categories in a manner I have calculated, and then accumulating
them into a simple variant of the Cumulative Advance-Decline Volume
Indicator (which we only get for a few exchange indices), I can produce
what I believe is a picture of whether buying (accumulating) or selling
(distribution) is driving the specific stock or index.
What I have attached is a chart that portrays my indicator, and it clearly
suggests that buying has been driving this market higher in a NON-divergent
way, in stark opposition to the simple Cumulative A-D line and the
Cumulative A-D Volume line. Moreover, IF (because I haven't been able to
find the definitive answer) the NYSE compiles advancing, declining, and
unchanged volume simply by doing the OBV of each equity in the Composite
Index, then my study may be far more accurate than the official exchange
data, which is included again today as the second chart for comparison
purposes.
Thought you might be interested.
Joe
Attachment Converted: "c:\eudora\attach\NYA.X_with_Allocated_Volume.gif"
Attachment Converted: "c:\eudora\attach\NYSE_AD_Volume.gif"
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