Daryl Guppy's Selected Newsletter Issue 35

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Dear Readers

 

TREND VOLUME ANALYSIS 3

By Daryl Guppy

SUBJECT SUMMARY

TREND VOLUME

Trend volume analysis is based on the Free Float concept developed by Gann and applied in modern markets by Woods and Arp. Trend volume analysis differs in that it uses the actual cumulative volume traded between significant trend points as a means of verifying future trend turning points.

Major trend turns or continuation points in market trends occur when all the old shareholders have been replaced with new shareholders. When the entire available share register has been turned over then buyers must bid higher to get stock because the new shareholders are reluctant to sell at a loss. It is a useful tool for trading Initial Public Offerings.

The shares available for trading are different from the number of shares on issue. Of the shares on issue some may be locked up under escrow conditions. Others are held by major shareholders and are effectively not available for trading. If the top 10 shareholders own 60% of the shares on issue then effectively only 40% of shares are available for trading. This is the volume trend figure used for the analysis.

This technique is most useful in identifying bottom reversals and continuation patterns in up trends. Trend volume analysis is used as a guide as we cannot be certain that the shares which have changed hands all belong to just one group of old shareholders. It is used to verify other trend change analysis.

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We start with a brief summary for new readers. Existing volume analysis tools concentrate on detail. If we attempt to scale these upwards and apply them on a strategic basis, existing tools, such as OBV give results that are inconsistent and inclusive. The study of raw volume behaviour does not provide a reliable way to understand trending and trend change behaviour.

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Martin Wong

Trading Coach

Investmatic Management, SoHo, Ara Damansara, Selangor DE, Petaling Jaya 47301, Malaysia


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