Useful Trading Tools - Part Two: Volume

The first post in this series covered the NYSE TICK and how it offers insights into who is participating in markets.  In this post, we'll take a look at what can be learned from raw volume data.

The above chart covers today's trading in the late morning in the S&P 500 e-mini (ES) futures.  Notice how we were trading in a narrow range for much of the time with volume averaging about a couple thousand contracts traded per minute.  At 11:49 AM, we got a flow to the upside, with over 9400 contracts traded that minute.  NYSE TICK hit a high of 587 during that minute and we traded right back into the range subsequently.

What did that tell you?

Buyers came in and couldn't lift the market higher.  There was a relatively large buying flow, but it could not raise the TICK to statistically significant levels.  That tells us that the buying was not heavy across the full stock universe.  It was aggressive buying (significant volume), but it could not generate significant directional movement.  

Not a bad piece of market information.

Sure enough, at 11:58 AM--just nine minutes later--the ES contract prints over 9900 contracts during the minute and volatility expands, breaking us out of the range.  Moreover, NYSE TICK plunged to -797 and then to -997 the following minute.  That is significantly broad selling on significant market volume.  

In Market Profile terms, we have rejected value in the prior range and now are trending to establish a fresh, lower value area.  The fact that the move out of the range occurred with significant, broad market participation is an indication that directional participants have taken control of the market.  As you know from the remainder of the day session, they did indeed take control and we closed near the lows of the day.

It is common for traders to refer to the minute-by-minute movement of the market as "noise".  For those who understand the dynamics of price action, however, there can be important signals amidst the noise.  When we have low to average volume, we know that market makers are dominant and directional participants are relatively inactive.  When we have significantly expanded volume, we know that directional traders have taken the market reins and we can adjust expectations accordingly.  A meaningful shift in volume is often a nice tell for meaningful shifts in trading patterns.

Further Reading:  Relative Volume and Volatility