Volume Limitations, Blowoffs and Selling Climaxes
Other Volume
Limitations in Futures
We've
already mentioned the problem of the one day lag in
reporting futures volume. There is also the relatively
awkward practice of using total volume numbers to
analyze individual contracts instead of each contract's
actual volume. There are good reasons for using total
volume. But how does one deal with situations when some
contracts close higher and others lower in the same
futures market on the same day? Limit days produce other
problems. Days when markets are locked limit up usually
produce very light volume. This is a sign of strength as
the numbers of buyers so overwhelm the sellers that
prices reach the maximum trading limit and cease
trading. According to the traditional rules of
interpretation, light volume on a rally is bearish. The
light volume on limit days is a violation of that
principle and can distort OBV numbers.
Even
with these limitations, however, volume analysis can
still be used in the futures markets, and the technical
trader would be well advised to keep a watchful eye on
volume indications.
BLOWOFFS AND
SELLING CLIMAXES
One
final situation not covered so far that deserves
mention is the type of dramatic market action that
often takes place at tops and bottoms-blowoffs and
selling climaxes. Blowoffs occur at major market
tops and selling climaxes at bottoms. In futures,
blowoffs are often accompanied by a drop in open
interest during the final rally. In the case of a
blowoff at market tops, prices suddenly begin to
rally sharply after a long advance, accompanied by a
large jump in trading activity and then peak
abruptly. In a selling climax bottom, prices
suddenly drop sharply on heavy trading activity and
rebound as quickly.
Volume Limitations, Blowoffs and Selling Climaxes
