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Low Volume Sell Signal In Play, Imminent Correction In Stocks Likely

As I often say, there isn't a single indicator or sell signal that is 100% effective, not even close. However, technical analysis is all about studying past price & volume history in order to help forecast future price moves as many of those patterns often repeat with similar results. In the past I've shared my use of using extreme drops in trading volumes to help identify pullbacks & corrections in the stock market & it seems that once again, an imminent drop in the broad market is likely based on the most recent plunge in trading volumes.

QQQ trading volume sell signals Aug 3rd

QQQ trading volume sell signals Aug 3rd

The chart above is a 2-year daily chart of QQQ (Nasdaq 100 Tracking ETF) with a horizontal line placed at the 22,249,980 level, which is simply the bottom of the range (i.e.- support level) of the 10-day exponential moving average of the trading volume in QQQ. In trying to identify extreme drops in volume to help predict trend changes, selloffs in particular, I don't pay any attention to an unusually low volume reading on any one day, rather I find it much more effective to use a moving average on the volume typically ranging from 5 to 10 days, as this greatly helps to filter out whipsaw signals & also helps highlight a trend of falling trading volumes vs. what might prove to be just a one-day drop, possibly related to an abbreviated or pre/post holiday typical low-volume session.

As the vertical red lines show, every single tag of that level over the last couple of years was nearly immediately followed by a pullback in equities usually lasting a week or more. I also noted the two 'cluster' readings over this time period, with a cluster being two tags of the low-volume support line (sell trigger level) in relatively close proximity without any significant increase in volume between the two readings. In fact, the July 20, 2015 top, in which the August flash crash followed shortly afterwards, came just 16 trading sessions after the sell cluster reading in mid-2015.

The two most recent drops to the sell trigger level (including the current reading) have taken the 10-ema down below the line, with the previous reading coming at the peak just before the Brexit selloff. Will this time be different? Anything is possible but as a trader, I play the odds & right now, the odds seem pretty good for a considerable & imminent drop in equities.

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Aug 3, 2016 5:36pm|Categories: Equity Market Analysis|Tags: , , , |15 Comments

15 Comments

  1. lee1 August 3, 2016 5:38 pm at 5:38 pm

    I hope so. Getting tired of this market hanging around and not pulling back some meaningful amount.

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  2. jacant August 3, 2016 6:18 pm at 6:18 pm

    Great $Study!

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  3. snp August 3, 2016 6:42 pm at 6:42 pm

    one question: what happens when the chart goes from mostly gray to all red?

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  4. alshaw August 3, 2016 7:14 pm at 7:14 pm

    i have been yelling from the mountain o great one that data and many more stats like your work are telling me crash

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  5. Shambo August 3, 2016 7:18 pm at 7:18 pm

    great chart, Randy, thank you. Hey – I want to tell you, in the post you referred to the vertical lines as horizontal..

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    • rsotc August 4, 2016 8:38 am at 8:38 am

      Thx Shambo, typo corrected.

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  6. dan123 August 3, 2016 8:47 pm at 8:47 pm

    great study Randy, i learned something new today of which i am planing on applying.
    thanks

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  7. snp August 4, 2016 12:59 am at 12:59 am

    al, those were fields you were yelling from. fields of cornbeans and weat.

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  8. joefriday August 4, 2016 7:30 am at 7:30 am

    Agree 100%.. but would add in the that the narrow spread in price can also sometimes be a clue…

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  9. roguetraderone August 6, 2016 5:32 pm at 5:32 pm

    Randy,
    Any chance of making this a live chart link? Or maybe I just missed it on the list. Thanks!
    rto

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    • rsotc August 8, 2016 12:16 pm at 12:16 pm

      roguetraderone – I wish TC2000 (which I created that chart with) had the ability to post a link. If I get the time, I can replicate the chart in stockcharts.com, which is the program I use for my live chart links.

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      • roguetraderone August 8, 2016 4:04 pm at 4:04 pm

        Randy, thanks for considering. I tried to figure out how to do it in Stockcharts and was just stumped.

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        • rsotc August 9, 2016 9:07 am at 9:07 am

          To generate a link to a chart using stockcharts.com, immediately below the chart on the first line (to the right of annotate, print, etc…) click on ‘permalink’. Then cut & paste the link. Not sure if you subscribe to stockcharts.com but keep in mind that it probably won’t share your annotations in the link if you are not a member as you can’t save an annotated chart. I believe that you must be logged in as a subscriber to save & share an annotated chart.

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          • roguetraderone August 9, 2016 1:53 pm at 1:53 pm

            It was that exponential moving average of the volume that I couldn’t do. I’m a member on SC but not the highest level. When I take my profits from X maybe I’ll upgrade. Speaking of, I can’t figure out how to do that on this site. I guess for now it’s when I renew?

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          • rsotc August 9, 2016 2:29 pm at 2:29 pm

            @roguetraderone – I think you can still do so with the basic membership at stockcharts.com. Go to the add “Indicators” below the chart & add “Volume” as an indicator. Click the green arrow to expand the ‘Advanced Options” on the indicators. Once the options are expanded, select ‘Exponential Moving Average’ from the drop-down menu, then add the MA period under the ‘Parameters’ field.

            Regarding the membership upgrade on RSOTC, I need to finish building out the membership upgrade forms so I can add those to the site in order for members to upgrade or downgrade from Gold or Silver. Until then, you can use the contact form (located under ‘Resources’ on the main menu bar at the top of the site) to let me know if you would like to upgrade & I’ll get back to you with the details.

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