Volume

BarroMetrics Views: Volume

Paul wrote: “Increasing volume means increasing equal number of sellers & buyers (bear & bull).

If the bull trend is “so obvious”, there will be decreasing number of people wanting to sell, though there is an increasing number of people wanting to buy.

The result will be: decreased volume?!”

I view the market as a dual auction process that uses prices to advertise opportunity. Let’s give an example to show what I mean:

Buyers       Price    Sellers

50             1299      20

25             1300      22

0               1301      0  Current price level

22            1302      25

20           1303      50

Prices are the result of buyers and sellers agreeing to transact at a certain level. In this example the most recent transaction has left a vacuum in that it has cleared all supply and demand at 1301. Now the buyers have a choice to pay up to the sellers.

Let’s say buyers pay up to 1302. We see price advance by $1.00; but, if the offer volume remains at 25, then the price movement will stall since there is additional supply of  3 to satisfy.  So at 1302, the sellers at 1302 face a choice of selling down or not selling their goods. If the demand at 1301 remains at 0, prices will have to move down to 1300 and so on.

Here’s what I see as the issue with Paul’s comment. If there are increasing numbers of buyers and decreasing number of sellers, what should happen to the daily ranges? Right! They should increase because the additional buying demand will keep pushing prices up until a level is found that attracts the sellers.

In Pete Steidlmayers words: “The function of markets is to facilitate trade”  i.e. go to level where the opportunities for trade are maximised. This maximisation is reflected by the volume and range of any given day.

Right now the S&P is moving up on greatly reduced volume and range. That suggests that although demand exceeds supply, the demand is not strong. Under those conditions, when demand meets an increased supply, we should see a tumble.  That’s why I see a market that is moving directionally on below normal volume as a high risk long.

6 thoughts on “Volume”

  1. Hi Ray,
    I have to agree with the above comment. Very nice explanation. I’ll be linking to this blog post.
    Cheers,
    Lance.

  2. Hi Ray,
    Thanks for the blog in response to my questions.

    Allow me to clarify my 2 statements:
    (1) “Increasing volume means increasing equal number of sellers & buyers (bear & bull).”

    The volumes I refer to are the actual transacted volume, not the bid volume and ask volume.

    If the volume is 1 million, it means there are 1 million actual buyers and 1 millions actual sellers.

    (2) “If the bull trend is “so obvious”, there will be decreasing number of people wanting to sell, though there is an increasing number of people wanting to buy.”

    If there is a Middle East war, and if all other central banks decide to reduce the amount of US dollars holding, everyone will be very bullish on gold (bars).

    It is so “obvious” that gold will be more valuable and prices will most likely to go up.

    In that case, the queuing buying volume will increase, but the queuing selling volume will decrease greatly.

    Most likely, the transacted volume will decrease.

    So, the decreased transacted volume confirms that traders are very bullish on gold.

    (Haha, am I preaching volume heresy? LOL!)
    ________

    To me, an increasing transacted volume during an initial trend is a good sign.

    Bull or bear, one side must be wrong.

    When many stop losses are triggered, it will add more momentum to the current trend.

  3. Hi Paul

    Thank you for the comments

    Unfortunately it’s clear from them that I was not clear in getting across my explanation of why I disagree with you.

    For example, taking your first point………

    my intention was to use the bid-offer ladder to show the nature of dual auction process and how it leads to transactional volume. And with that understanding, I sought to show why declining volume, without an increase in range, is a warning of a possible change in direction.

    So, we have a situation where I have not been clear; and I know I am unlikely to be clearer, even with any additional postings. That being the case, I’ll just say I agree to disagree on this issue.

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