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A Review of XOP Volume

I am basically a technical trader, and the only two pieces of information that really mean much to me are price and volume. On most days, it is volume that is the more important of the the two. I used to be a huge CNBC junkie back in the internet bubble days, back when CNBC was relevant and useful, and my favorite person on there, Art Cashin, would always know whether the volume was high or low for ANY point during the day. He called it the “run rate” and it is just something that I always found incredibly useful.

The key to volume is to always know WHO you are playing and trading against. Are you trading against smart money or are you trading against market makers? Volume tells you this. Volume confirms price. If price is supported by volume, then be willing to be more trustful of the move. If price is not confirmed by volume, then be suspicious. There is a great book by Tom Williams titled “Mastering the Markets.” In it, he discusses his theory of Volume Spread Analysis. It is probably one of the best books out there and a big part of how I trade. You can find a free copy here.

I keep a running total of volume for the past 50 trading sessions in the XOP, using 30 minute blocks during the day. I track an average volume for each individual 30 minute block, as well as an average running total for the day. Here is a look at where things stand currently (share values in 000’s):

Time    Avg Vol   Run Rate
10:00     1482     1482
10:30     1386     2868
11:00     1074     3942
11:30     916      4858
12:00     976      5834
12:30     630      6464
1:00       572      7036
1:30       670      7706
2:00      570      8276
2:30      759       9035
3:00      641      9676
3:30      777       10453
4:00      2520    12973

So, from the above chart, if we look at the clock during the trading day and it says 11:30, then I know that on average we should have traded about 4.8 million shares (average cumulative 9:30 to 11:30 volume over the last 50 trading days). I also know that during the period from 11:00 to 11:30, we should have traded about 916 thousand shares (average 11:00 to 11:30 time block volume over the past 50 sessions).

You can use any time period you want, I just prefer the 50 period figure because the 50 day moving average is something that I use to judge the larger trend. Matching up the volume and price over the same larger trend timeframe just works for me. Also, these numbers are not exact, they are just a very handy quick reference to gauge an average. Precision is not required and I do not use pre-market or after hours volume in my numbers. There is also one other quirk in these numbers, I do not use the 30 minute bar from the 10:30 to 11:00 am Wednesday time period. That bar is usually huge due to the EIA release and really skews the overall number. We are simply looking for an average here to use every day of the week and don’t want that one bar to abnormally affect the count.

Here are two weeks of XOP data, the first is from the week of July 31 – August 4, the second from August 21 – August 25:

Time        7/31       8/1         8/2         8/3         8/4          Avg     Run Rate
10:00     2000       1100       4400       1200       1900       2120       2120
10:30     1900       554         3700       2000       1500       1931       4051
11:00     1800       779         3200       1200       1300       1270       5321
11:30     688         1400       1400       477         1000       993         6314
12:00     900         1300       1600       863         415         1016       7330
12:30     605         467         586         1000       680         668         7998
1:00        635         870         506         1000       561         715         8713
1:30        410         580         847         662         525         605         9318
2:00        860         185         358         1500       354         652         9970
2:30        2000       863         1900       2200       508         1494       11464
3:00        517         1200       2700       1300       1100       1363       12827
3:30        561         529         3500       2600       1300       1698       14525
4:00        2000       2800       3800       5100       2700       3280       17805

 

Time       8/21       8/22       8/23       8/24       8/25       Avg    Run Rate
10:00     665         1000       540         828         1200       847         847
10:30     3200       1000       813         1700       900         1523       2370
11:00     1100       496         846         440         365         600         2970
11:30     492         900         821         430         528         634         3604
12:00     3100       546         667         900         444         1132       4736
12:30     556         562         706         234         357         483         5219
1:00        331         209         430         400         287         332         5551
1:30        213         268         204         267         135         218         5769
2:00        445         589         407         218         319         396         6165
2:30        681         551         225         232         210         380         6545
3:00        338         352         286         263         473         343         6888
3:30        379         303         318         248         547         359         7247
4:00        1200       1900       1800       1000       1600       1500       8747

 

Having a solid reference point on volume really brings out the difference in these two weeks. The first week was very heavy volume and something that is a great trading environment, the second set is a situation where the volume is almost non-existent. When paired with price, these two sets of data tell us WHO is involved in the market. In the first set, there are large traders present and the moves in price are considered more “real”. The second set is primarily market maker induced movement with none of the smart money really doing anything, just random noise. Knowing who is in the market is key when determining if price moves are “real”. I would gladly put money on the first set of data as that price move isn’t easily reversed. However, no way would I put money on the second set of data, as that light volume price move can easily be reversed when the smart money returns to the market.

Never depend on just price when you have such a great confirmation tool available in volume. The two should always work together. I see guys trading just price, and I really have no idea how they can possibly refer to themselves as “technical analysts”. The market gives us this information, and to just discard one half of the available information that the market gives is just foolish. Good luck this week and I’ll post my Monday outlook tomorrow morning.

 

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