Hi Ed,
This is a good point to keep in mind, but one has to also remember
that somebody has to price in sufficient directional expectation to
get the futures out of line enough to trigger programs in the first
place. It is the response of speculators to the fact that futures
have been arbitraged back into some degree of alignment after
programs trigger that will determine if the game gets repeated in the
same direction, of course.
When this game becomes directional, you absolutely cannot write it
off as "just programs". Programs never get triggered if futures
sentiment doesn't get extended, one way or the other. Without the
sentiment to extend futures, there would be *no* program-trading, in
fact. So the very triggering of programs is a sign of some
directional sentiment, and the more often programs trigger in the
same direction, the more obvious the strength of that sentiment.
Of course, one day does not (usually) count for much. But over the
course of a week or weeks, if the programs are mostly one side or the
other, and they *are* mostly one way or the other in major advances
or declines, there is your directionality. Moreover, when the moves
are major, you will see a surge in program trading, as sentiment
repeatedly extends futures.
Unusual volume coupled with price directionality is what is
important, of course. Make sure it's indeed unusual, and that it
shows some signs of persistence. Then be sure to get on the train
before it leaves.
Volume is not remarkable all that often. But when it's really
meaningful, it's *always* easy to spot. A lot of people can't trade
with it, however, because it does require enough patience to wait for
it, enough patience to let it show persistence, during which time
price is already on the move, and then enough determination to trade
with that flow, even though one has by now missed the "perfect"
turning point by many percentage points. But when volume becomes
remarkable, those missed percentage points won't mean much. Many
more will follow.
Yuki
There are lots of players of course, with different objectives. In a
general advance or general decline, some will take outright
positions, but some will wait for the arbitrage.
Wednesday, September 13, 2006, 11:29:42 PM, you wrote:
EH> Re: Volume Indicators
EH> It might also be useful to point out that 50% of the volume on the
EH> NYSE is program trading. This volume is generated based on a price
EH> difference between the cash SP500 and SP500 futures(and other pairs).
EH> If a buy program is triggered, generally stocks in the SP500 index
EH> are bought, but with no expectation that the market will actually go up.
EH> So be careful in interpreting what positive volume really means -
EH> genuine optimism or just an expectation that the cash-futures spread
EH> will eventually narrow, thus generating a profit for the trader.
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