Stock Duel!

My friend AJ made an interesting comment about using the On Balance Volume indicator to raise question about my claim that instutitons had not been selling as retail had been buying for the first quarter of 2006. You can read more about OBV here.

First, I pulled up the daily and weekly charts of the 1yr $NYA and plotted the OBV. What I noticed was a difference of opinion based on which chart was used. The daily chart continued a bullish trend in the OBV but the weekly chart showed a divergence in price similar to the TRIN that I discussed in my previous article. Institutions deal in volumes that outweigh single day movements. In this case, I tend to believe that a weekly chart of volume v. price analysis is significantly more valuable to the chart analyst.

As you can see in THIS CHART there is significant divergence in the first quarter between the price activity and the On Balance Volume indicator. This was later followed by the CMF forming a lower high on the last up week in late April early May. The ideal result from these observations would have been to enter significant short positions following a breakdown/reconfirmation of the strict uptrend of the 2 quarters from Oct 05 to Apr/May 06. $NYA succumbed over 400 points since that point.

In review, I believe that following the OBV of weekly movements in an attempt to decrypt institutional activity may prove more fruitful than using daily charts. Using the TRIN together with OBV and other volume/direction indicators are quite informative. Furthermore, I would like to point out that these views have not been backtested so the expectancy of using such a method is not necessarily positive but it may provide future usefulness if observed again.

I decided to look at the TRIN so far this year and compare it with price activity of the NYSE Composite Index. Here is an annotated chart showing the details: Link

• note: NYSE Composite Index = $NYA

My first observation is the difference between the rise in the $NYA and the running average of the TRIN. We will recall that a TRIN over 1.0 indicates volume flowing through decreasing equities and a TRIN under 1.0 indicates volume flowing through rising equities. In the first quarter we see the TRIN 1, 2 and 3 week average running solidly above 1.0 whereas the index ran up 10%.

Many interpretations exist but one I will offer is that “smart” money or institutions which constitute the majority of the volume have been selling in this run-up while “retail” has been buying the apparent strength only to be left break-even for the year, if lucky.
Reflecting upon the period from April to May we note this was the period in the news where multi-year highs were being broken. Perhaps this is the index equivalent of a bump-and-run-formation.

This correction seems only logical. I will be looking at a broader perspective as well as looking for this situation in the past to determine if it can be replicated with any sort of confidence in the future. I am also interested in whether or not the sell-off will continue for any period of time or whether broad uptrending lines will be respected. Please leave any comments you may have on this analysis or suggestions/thoughts.

Further research to be done: Include analysis on $VIX and relate with Indices and TRIN, etc. Include other time periods as well as a 3-year analysis. Include analysis of weekly ticks instead of daily ticks.

In my opinion this technical bounce doesn’t carry much water. The stats are quite interesting though, the TRIN on the NYSE ended at 0.19. The QQQQubes were up 2.71%! and the volume for the $indu was significantly lower than the red days prior so with tomorrow’s options expiration I’m expecting a moderate day and possible small gains. I sold some calls on TIE playing tomorrow’s expiration. Seeing metals up 20% in 2 to 3 days is asking a little much as far as a healthy reversal is concerned. Whiplash tends to keep people out of the markets as they wait for more comforable settings.  To me it seems much of the options’ underlying movement occurred today. The $vix ended down 25.91% but still significantly high relative to the bull-run from a few weeks ago.

Frank and I have put off our virtual ETF but we promise we’ll get on this soon.