The One Quantity Indicator You Ought to Comply with | The Aware Investor

I used to be requested just lately about quantity, particularly why I do not function quantity typically on my day by day market recap present, CHART THIS with David Keller, CMT.  I replied that once I was studying the technical evaluation toolkit earlier in my profession, I very a lot paid consideration to quantity indicators.

However within the years to observe, I developed a course of that targeted extra on pattern and momentum, and I felt the strategy labored fairly properly regardless of the dearth of quantity inputs.  However there’s one indicator that has been pretty profitable at recognizing market turns over the past yr, and it is a chart I will probably be following intently within the weeks to come back.

Quantity to Chaikin Cash Move

First, let’s speak about how we measure quantity over time.  The best option to symbolize quantity is with the day by day quantity bars, serving to us decide if immediately’s quantity is above or under common.  And whereas that may be useful for navigating the short-term atmosphere, it does not assist us assess how quantity is evolving over time.

Well-known strategist Joe Granville developed the idea of “On Stability Quantity” the place he created a cumulative whole of quantity by including up days’ quantity and subtracting down days’ quantity.  Just like an advance-decline line, it does assist to point the final directional pattern in quantity.

The problem right here is that we’re taking a complete day’s quantity and contemplating all of it bullish or all bearish, relying on whether or not the shut was larger than yesterday.  What about if we completed on the excessive or the low of the day.  Should not that matter not directly?

An Advance-Decline Line for Quantity

One other legendary technician, Marc Chaikin, improved on Granville’s work by daily’s worth bar.  If the shut was nearer to the excessive, then that day’s quantity ought to be value extra within the working whole.  And if the shut was close to the center of the vary, that day’s quantity ought to be value much less within the calculation.

Now we are able to see the working whole of day by day quantity, however with extra worth given to the times with highs close to the excessive or low for the day.  So huge up days and down days turn into far more vital after we contemplate the general pattern in quantity.

When the indicator is above zero it is shaded inexperienced, and long-term uptrends typically function prolonged durations of inexperienced.  When the indicator is under zero, represented with the crimson shading, this implies a interval of distribution because the down quantity seems heavier.

Looking forward to Quantity Divergences

Whereas crossing under the zero line would symbolize a normal rotation in quantity from extra accumulation to distribution, the actual advantage of this indicator is within the early warning signal based mostly on divergence.

Because the market was transferring larger in July 2023 into the eventual August excessive, we noticed a decline within the Chaikin Cash Move.  We noticed an identical sample in March 2024, because the SPY pushed larger even because the CMF was trending decrease, in addition to in July 2024.

Discover how the present studying exhibits the Chaikin Cash Move studying as nonetheless fairly robust for the S&P 500?  This implies that the market continues to be able of energy, given the stronger bullish quantity in current weeks.  However this chart additionally tells us to maintain a cautious eye on the CMF within the coming weeks.  As a result of a bearish divergence right here may present an early warning signal to conscious traders staying attuned to the rhythm of the markets.

Heads up!  We simply launched our new podcast, Market Misbehavior with David Keller, CMT, in October!  Take a look at our current interviews with Mark Newton, Joe Rabil, Mish Schneider, and Mike Livingston.  Tons extra nice conversations coming your means very quickly!

RR#6,

Dave

PS- Able to improve your funding course of?  Take a look at my free behavioral investing course!

David Keller, CMT

President and Chief Strategist

Sierra Alpha Analysis LLC

Disclaimer: This weblog is for instructional functions solely and shouldn’t be construed as monetary recommendation.  The concepts and methods ought to by no means be used with out first assessing your individual private and monetary scenario, or with out consulting a monetary skilled.  

The creator doesn’t have a place in talked about securities on the time of publication.    Any opinions expressed herein are solely these of the creator and don’t in any means symbolize the views or opinions of some other particular person or entity.