The Dow Report: The Market Volume May 21
By Tim W Wood CPA, May 21, 2004
Below is a daily chart of the Dow Jones Industrial Average going back to December 2001. The green line at the top of the chart is a 34 day moving average of NYSE advancing volume. The red line is a 34 day moving average of the NYSE declining volume. First, I want to focus on the advancing volume line. Notice that as the market rallied out of the March 2003 low advancing volume expanded. This expansion of advancing volume continued into the June 2003 high. From the June 2003 top the market sold off into a minor low and then continued its advance, but notice how advancing volume began to lag and never reached the level seen back at the June peak.
Let's now look at the declining volume. As the market rose into the June 2003 top, you can see that declining volume did move up ever so slightly. This rise in declining volume was perfectly normal as the market moved into the June short term top. But, notice how advancing volume continued to decline and declining volume continued to advance as the market basically went sideways into the early August low. This was a clear sign of distribution as the market moved into the early August low, which marked an intermediate term cycle low. I have marked this low on the chart with a "w."
From this early August low declining volume contracted into September and then began to rise into the November intermediate term cycle low. Again this rise in declining volume and the decline in advancing volume was clearly distribution as the market moved into this intermediate term cycle low.
This brings us to the parabolic blow off into February 2004. Notice how the declining volume began to move down as the market moved up into January 2004. Then, in early January the declining volume began to rise as the distribution process began once again. Just as the public becomes the most bullish and is now convinced that the new bull market is clearly underway, declining volume reaches levels not seen since March 2003. This reeks of smart money distributing their stock to the ever so bullish public. Notice how the declining volume continued to expand as we moved into the March 2004 intermediate term cycle low. Then as price moved out of the March low, declining volume has continued to rise and is now at levels not seen since October 2002. In fact, declining volume has now moved above advancing volume. I see no other way to look at this other than it being a massive distribution of stock to the unsuspecting public.
Now I know that someone out there is probably thinking that you can’tuse the NYSE data because of the interest related issues and so forth that are included in the NYSE. Well, I'm personally not convinced that this data is as corrupt as many would like for us to believe. The reason I say this is, if we look at the chart below of the AMEX advancing and declining volume, the picture is very much the same. I'm not going to walk you through each point blow by blow like I did above as it would just be redundant. If you will just take a few minutes to study the chart below you will see that the characteristics of the AMEX data is very much like that of the NYSE.
I have also included a chart of the NASDAQ below with a 34 day moving average of advancing and declining NASDAQ volume. Again, here the volume characteristics are similar to what we see above in the NYSE and the AMEX. The advancing volume peaked out in June 2003 and since September 2003 declining volume has been making higher lows and higher highs. Currently the 34 day declining volume moving average has moved above the advancing volume. However, in this case the declining volume has not moved above its March 2004 peak.
The bottom line here appears to be that we are seeing a mass distribution of stock. It also appears that this distribution process is not yet complete as the professional continues to feed his stock to the public. The public continues to listen to the mainstream media telling them that this pull back is simply a buying opportunity and therefore they continue taking the bait. The technical picture is currently negative from many angles. However, one does not have to understand Dow theory, Cycle theory, Elliott Wave or any other technical discipline to understand that it takes volume to push the market higher. Specifically, it takes rising advancing volume in order for an up-trend to remain healthy. Anyone should be able to see from these charts that advancing volume has continuously shrunk since June 2003. It is also obvious that declining volume has been expanding and has now surpassed the advancing volume. If you look back at the declines in 2002 and 2003 you can clearly see that this is not a positive situation for the market and unless this changes soon we are very likely to have trouble just ahead.
Tim W. Wood
© 2004 Tim Wood