Victor Sperandeo Trader Vic II Principles.of.Professional.Speculation.(1998)

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.Thus, I lost a significant portion of the gains I made by beingshort, and missed the spectacular December rally, which was a classic breakout on heavy volume.SECONDARY TECHNICAL TOOLSVolume RelationshipsAlthough definitely a technical indicator, volume relationships are probably the least objective of the technicalmethods I use.Nevertheless, no trade should ever be made on the stock market without considering volume.The reason I say that volume relationships are the least objective of technical tools is that there are no hard-and-fastrules.Instead, there is a set of general observations that must be interpreted in a specific market context.And, the onlyway to interpret them accurately is to watch the market every day to get a feeling for "normal" versus "heavy" or"light" volume.The following list gives general observations; I then demonstrate how I applied them in evaluating theNASDAQ scenario.Important Volume Relationships1.Volume tends to move with the trend; that is, in a bull market volume tends to be heavier during rallies andlighter during declines; in bear markets, the converse is true (see the bottom portion of Figure 10.6).Theexception is when the market is approaching a correction, which is covered by the next observation.2.In an intermediate rally, bull or bear, a market that is overbought tends to lose volume on rallies and gainvolume on declines.Conversely, in an intermediate decline, an oversold market tends to gain volume on ralliesand lose volume on declines.1533.Bull markets almost always end in a period of extraordinarily high volume (relative to previous periods) andbegin in light volume.Stated differently, bear markets almost always begin with heavy volume and end on lightvolume.Observation 3 bears closer scrutiny in light of the example shown in Figure 10.6.If you look at the volumesection of Figure 10.6, for example, you will see a marked swelling of volume beginning in late January.This isparticularly interesting because the OTC sector was far and away the top performer throughout 1991 and alreadyenjoyed fairly good volume.If you now study volume relationships in the lower portions of Figure 10.7, you will see asignificant difference in the patterns of volume on the Dow and Transports versus the OTC composite and the S&P500.Specifically, the volume on the Dow and the Transports diminished significantly in February and March duringthe sell-off, while the OTC Composite and the S&P 500 remained high relative to preceding months.This was a key reason I told my institutional subscribers in the February 20 issue of my investment advisorypublication, The Rand Monitor Of Market Risk, to "hold long positions in cyclical stocks, and move to minimumexposure in OTC and highgrowth stocks." The OTC, the S&P 500, and several other indexes that had been the marketleaders were showing classic technical topping action from virtually every aspect, and volume was confirming theaction by being high both in the final rally and in the ensuing sell-off.The OTC market, in particular, was long overduefor at least a substantial correction, and in my opinion, was taking a leadership role in heading for a new bear market.By the same token, the Dow and other cyclical indexes were showing bullish action, with volume diminishingon the downside and expanding on the upside.This factor weighed heavily in my decision to play the market bothways: long the cyclicals and short the OTC and growth stocks.This brings me to another important, but secondary, technical principle of market analysis that few peopleapply to markets as a whole relative strength.FIGURE 10.7 Volume patterns, Dow Jones composite, and Standard & Poor's 500 composite.154155Relative StrengthAs recently as 10 to 15 years ago, you could pretty much get a feel for "the market," referring to the stockmarket as a whole, by analyzing the Dow averages-the Industrials, Transportations, and Utilities.No more.Asadvances in information technology have made it possible to isolate and analyze different market segments, it takes amuch broader view to understand stock price movements.In tracking the broader market, I watch no less than 18indices, tracking the daily closings, extent, and duration of each.Using Dow Theory as the basis for analysis, I compareprice movements, volume relationships, and breadth (the advance/decline ratio) to look at the similarities anddifferences among the many averages.In a strong bull market, all the averages will move in the same direction.In an economy of mixed strength andweakness, such as the current one, some of the indices, such as the Dow Industrials and the XMI (Major Market Index),move together, while others lead or lag the other indexes.In other words, I look for relative strength relationshipsamong the many indexes.Robert Rhea alluded to the concept of relative strength with the phrase, "the habits of stocks and how theyperform against one another." Although he was referring to individual stocks, it is now necessary to evaluate the habitsof indexes and how they perform against one another.As I mentioned earlier, throughout 1991, the S&P 500 and theOTC indexes outperformed the industrial indexes and the broader indexes such as the Dow and the AMEX-they hadgreater relative strength.To project the future accurately, it is important to identify the relative strength of the differentmarkets and the implications they have for trading.To carry forward the analysis of the OTC market, it didn't take a genius to look at the charts throughout 1991and determine that the OTC was the strongest market.But what is not intuitively obvious is that because it was thestrongest market for so long and in a speculative environment, it would also be the market that would fail first and mostswiftly in a marketwide downturn-if the shelves of a china cabinet collapse, the pieces on top are most likely to break.The 200-Day Moving AverageAlthough it does not apply to the current example, another key technical indicator I watch is the 200-daymoving average [ Pobierz całość w formacie PDF ]

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