Nov 15, 2011

A potential way of trading this market (exc options and such) — with low daily prob of big downside and high prob of small upside — is to fade volume. In this environment, investors are more likely to panic sell on a headline than to panic buy on lack of a headline. So high volume dump days (on news) may remain a good trading opportunity on the long side. This is usual.

More unusual, a better indicator for toppiness may be declining volume rather than more typical indicators like breadth or sentiment or chart action. Chart action is likely to whipsaw in this market. Breadth is too laggy for short-term trades. And sentiment is likely to be “headline-following” lagging/wrong.

If volume is indicative – either daily or some short-moving average of volume, then this current short-term upcycle may be over.


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