Mastering the Stock Market by John L. Person

Author:John L. Person
Language: eng
Format: mobi
ISBN: 9781118416594
Publisher: Wiley
Published: 2012-11-14T08:00:00+00:00

CURRENT EVENT ANALYSIS

Now that we have covered how to use the OBV indicator with trend-line breaks and incorporating patterns such as head-and-shoulders formations, I also want to emphasize the importance of the relationship between that indicator and volume bars. We have covered a small sampling of this indicator to actual volume relationship, and so far, it appears that when prices rise, it's typically on declining volume, and when the market falls, the bottom in prices is typically associated with a high peak volume day.

Let's fast-forward and focus on the most recent market action. In the first quarter of 2012, the stock market had rallied toward nosebleed levels, with extremely minor corrections lasting a day or two before accelerating upward. Everyone was calling for a correction, yet the market continued to advance. Apple's stock traded to an intraday high of 600.01; the market seemed unstoppable. In fact, the Commodity Futures Trading Commission's Commitment of Traders (COT) data showed that small speculators were short the whole way up.

I myself was a petrified bull. I was mildly long and using the rally to lighten my long positions. Hindsight, as we know, is 20/20; I should have doubled up on my longs, but instead, I was cautious. The good news, and the lesson learned here, is I was not selling short the market. In fact, staying true to the analysis that I am sharing in this book, at PA Stock Alerts, we were long a select group of stocks in the financial and energy space. The reason is this: These sectors were in a seasonally strong time, and the market in general was maintaining the bull trend. As the old adage goes, the trend is your friend until it ends. Examine Figure 6.9, which is a daily chart on SPY with the OBV indicator in the middle quadrant and the volume bars at the bottom of the chart. This chart has a very similar characteristic to the significant rallies we covered from the low of 2009, the move in 2010, and the rally in 2011 in the sense that the OBV indicator was trending higher in concert with prices, while at the same time, the trend in the daily volume was declining.

FIGURE 6.9 SPY: SPDR S&P 500 ETF Trust (Daily Bars)

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