Here in the UK in the 1970’s one of the most popular TV comedy series was one called Dad’s Army. The series was set during the second world war, and followed the exploits and adventures of the Home Guard which was established to protect the country in the event of an invasion. One of the principal characters was Private Jones, whose catchphrase whenever some problem arose was to run around shouting ‘Don’t Panic’…..Don’t Panic’ and this perhaps best encapsulates the current sentiment in equity markets over the last few days. As a significant investor in equities myself, I am writing from a personal perspective, and my view, as always, is don’t panic. Second, I am always somewhat nonplussed at the images presented by the mainstream media of traders with heads in their hands, looking dejected and downcast whenever there is a bout of market volatility. An image suggesting these players only trade one side of the market!
For investors this is not a time to panic, as we are witnessing another correction, and the reason for this view is simple. To date there has been no selling climax and until there is, the markets will continue to remain in a longer term bullish trend. Indeed yesterday’s price action was symptomatic of a shake out of the weaker players, with the depth of the lower wick to the candle on the daily chart for the YM emini (and other principle indices) telling its own story. Volume of course completes the picture, with yesterday’s ultra high volume confirming the stopping volume and consequent buying off the lows of the session.
This, of course, begs the question of whether we are going to see a repeat of the V shaped recovery of earlier shakeouts? And the answer is: quite possibly, and certainly based on the volume profiles of the last few days appears increasingly likely, and indeed in early trading this morning, the YM has already climbed higher, along with other major indices, with the FTSE 100 also moving back to recover strongly. In addition, and more significantly, the volatility indicator was also triggered on the daily chart, with the consequent likelihood of the price action reverting back within the spread of yesterday’s candle.
Without doubt yesterday was a dramatic day, but also a long overdue shakeout and correction given the extent of the congestion in equities and indices. Furthermore, the effect of yesterday’s price action depends on what point you entered the market as a longer term investor. For me, it was back in 2009, when the buying climax arrived following the 2008 sell off, and I have been holding investment positions ever since.
The market turbulence of the past few days can be painful to watch, but the motto is simple and I echo dear old private Jones – Don’t Panic…Don’t Panic, and if you have any doubts whatsoever, then I would suggest applying volume price analysis to your trading and investing will help to calm the nerves and keep emotions in check! We may indeed see a further shake out in due course, with some further buying at this level, before a consolidation and recovery in the longer term upwards trend continues once again.
And finally of course, as an Emini intraday trader, it’s simply a question of being on the right side of the market.
By Anna Coulling
Charts from Quantum Trading and NinjaTrader
Hi Anna. Would you please explain more about the action of US indexes last few days. You said it’s not a climax sell yet. How can you explain the destruction in price from the top and on expanded giant volumes?
Thanks,
Trang
trangdoan04@yahoo.com
Hi Trang – many thanks for your question, and the context of this analysis is over the longer term from an investing perspective. If you consider the monthly chart and associated volumes, there is nothing to suggest that we have seen a selling climax just yet, and the comparative period is back in 2008 and early 2009 with stopping volume over several months signalling the end of the buying climax on ultra high volume. As always this phase of price action can last for an extended period, and only once all the selling or buying has been absorbed will the longer term trend then reverse. Furthermore the volume associated with the monthly candle is only average and certainly does not suggest major selling by the insiders at present and for such a deep correction, I would certainly expect to see substantially higher volumes than at present, even allowing for the summer period. From an intraday perspective ofcourse, I have no interest in whether the market rises or falls longer term, but merely that I am on the right side when trading the indices as a pure speculator, and not as a longer term investor. I hope the above helps to explain and thanks once again for taking the time to write which is much appreciated – all best wishes – Anna
Hi Anna,
I just now see your explanation for my question. I didn’t know it’s here to check. Sorry for emailing/twitting you many times for the same question. Thank you very much for answering and explaining my question! – Trang
Hi Anna, how could have we predicted this move when the volume on the first narrow spread candle was only average/below average?
Hi James and many thanks for your question which is much appreciated. In terms of the price action, this was like any other, a market which has been in congestion for many weeks, and like all congestion phases, they always come to an end eventually, whether on a 1 minute or 1 month chart, and its a question of being patient and waiting for the catalyst. Until the move lower, this market could have broken to the upside equally well. Once the market breaks, either to the upside or down then its time to anlayse the price action and volume to confirm whether the break away is genuine or false. So it’s not so much in predicting the when, it’s more to do with getting in once the move has started and the break away has started and then be validated with volume price analysis. In this case we also had the VPOC overhead confirming the weakness from above, and once the first two candles had formed the breakdown was duly confirmed with rising volume. I hope this helps and many thanks once again – all best wishes – Anna
Hi Anna,
The volume in the SPY has been tapering off since the 24th on daily charts, should volume be ignored leading up to big decisions like the Fed rate decision tomorrow? Is the rally most likely just traders looking to gamble ahead of the fed? Does the looming fed decision eliminate the possibility of this rally being a trap since insiders don’t know what the decision will be ahead of time(I assume they don’t)? I’ve just finished your VPA book recently and have no experience with volume around such a highly anticipated decision. Is it more likely that the lack of volume is related to a lack traders willing to gamble ahead of the decision, causing it to continue to taper the closer we get to it? Is there anything on the chart to interpret that would make trading ahead of the fed not a coin flip?
Hi David – first of all many thanks for taking the time to write which is much appreciated and this is certainly an interesting question, and again really does highlight yet another aspect of volume price analysis which is the lack of participation which we have seen lately in all markets. This aspect of volume price analysis is one you will see repeated in all timeframes but it is unusual to see it in the slower timeframes, and really highlights two things. First the importance of the announcement which has been trailed by the FED for some time, and second the fact that few can predict with any degree of certainty which way the FED will jump. Indeed in the last hour or so, the statement has been released with a ‘no change’ decision, but market participants are no less clear on when – all we can be assured of is interest rates will rise sometime between now and 2017 ( taking the extreme view of some members!) Where we often see this withdrawal from the market in terms of participation is in the run up to a major news release. Typically markets will calm perhaps an hour or two before the data is released and then explode into life with a consequent surge in volume, and of course you will also see low volumes in the run up to holiday periods, and also on public holidays. One thing you can always be assured of, is the insiders will be waiting and ready to pounce trapping traders into weak positions on the news, and which volume will help to signal clearly on the chart. If the insiders are buying then we buy, and if not, we stay out as its a trap move! – I hope this helps to answer your question and many thanks once again – all best wishes – Anna