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Turn Up The Volume

09/29/10 09:18:32 AM
by Donald W. Pendergast, Jr.

Most traders use some form of volume analysis; here's a look at a unique way to measure the current momentum of the volume trend in your favorite markets.

Security:   ES, SP, SPY
Position:   N/A

Recently, I made the case for a potential triple-top buy setup in the mini Russell 2000 futures contract, and we may be getting close to seeing a breakout attempt after all. The other stock indexes are also in similar configurations, so let's have a look at an intraday chart of the emini S&P 500 futures to see what the volume patterns are suggesting and how you can learn to put a very unique volume indicator to work in your own trading regimen.

FIGURE 1: EMINI S&P 500. The Barry Taylor ProAm paint bars, Better Momentum, and Better Sine Wave SR indicators can help traders quickly determine where the lines of least resistance reside in almost any liquid market.
Graphic provided by: TradeStation.
Figure 1 is a 12,500-tick chart for the continuous emini S&P 500 futures contract (same data as the current front-month contract [December 2010] since September 8, 2010). On the chart are three Barry Taylor indicators; the one at the bottom of the chart is called "Better Momentum" ( it measures the momentum of the volume trend) and the horizontal red and white dotted lines on the chart are the "Better Sine Wave SR" (support /resistance) plots. The price bars turn blue in areas of heavy professional buying or selling (the Barry Taylor ProAm paint bar study in TradeStation) and yellow in zones where amateur traders are buying or selling heavily.

You can discern a great deal of the market's intentions by watching how these two trading tools work; first off, when the market makes a confirmed low (such as the cycle low on the lower left portion of the chart -- it's actually the second low of a double-bottom pattern) and then starts to rapidly rise again with the Better Momentum indicator spiking sharply, culminating with a big aqua dot on top of the indicator, even as the price barrels above a previously plotted Better Sine Wave SR level (white dots highlighted by green arrow) to a new level of price equilibrium near 1,140.00 to 1,144.00.

The big idea here is this: Volume is the explosive force needed to move a heavyweight market like the Standard & Poor's 500 any significant distance, and when you see key areas of support/resistance breached during one of these powerhouse volume spikes, you can be pretty sure that the move is for real. In addition, did you see the sustained professional buying (blue bars) on the way down to the major low just before the reversal higher? The pros often use their very deep pockets to scale into their positions when they are confident of an impending reversal at a nearby SR level. Then note how the amateurs (yellow bars) were completely caught off guard as the market left them and their failed short attempts) in the dust. Interestingly, the "little" traders also got their heads handed to them trying to buy the breakout at the very tip-top of the chart (the little "R" stands for "Rambo") as they attempted to take on the big 50- and 100-lot traders with their single-lot pea-shooter gambit to latch on to a phony breakout north of 1,145.00.

Currently, the mini S&P 500 has managed another volume spike/break back up toward 1,141.00 and is resting comfortably, thanks to the white Better Sine Wave SR support near 1,138.00. With all of these US stock indexes primed to go higher, a break above 1,146.00 and then 1,149.25 could be the de facto launch of a significant multiweek (month?) rally, especially if it can keep such lofty gains intact until the very bullish year-end seasonal pattern kicks in -- usually by the last week of October. This could be an exciting juncture for the bulls, and even the bears might want to pay attention too, just in case this rally setup fails and sets off a whole new round of October panic-style selling.

The Barry Taylor ProAm paint bars can be invaluable for any trader using a discretionary trading approach, and when used in conjunction with the Barry Taylor Better Momentum and Better Sine Wave SR indicators, they can afford traders a privileged view into the two key dynamics that truly drive all freely traded markets -- volume and support/resistance.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address:

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