How Volume Determines Short Term Price Action
It's the skew of volume -- not total volume -- that matters.
For several months, I've heard complaints about volume in the media. I usually look at On Balance Volume (OBV) to decipher the relative Up versus Down volume and OBV has kept pace with the market advance. In my opinion, it's not the total volume but the skew of volume that determines short-term price action. Mark Twain inadvertently explained this concept best when he quipped, "It's not the size of the dog in the fight; it's the size of the fight in the dog."
For the intermediate term, the Advance Decline lines are still in sync with the market advance. As I've been sharing for weeks (4/7 note on change and 3/30 mkt thoughts; subscription required), this (in conjunction with several other indicators) denotes that currently, the intermediate health of the market remains robust.
See a Chart AD below:
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Also, looking at Dow Transports proved to be quite helpful (note on 4/8; subscription required), as this average is trading at its 52-week high today. We've noticed several long set-ups lately (First Solar (FSLR) and Goldman Sachs (GS); subscription required).
However, in the very short-term, yesterday’s reaction to Intel (INTC) might have captured some panic-buying as evident in many short-term sentiment readings. The best thing the market can do after this workout is rest and work off these sentiment extremes using "time." The other alternative is to take a beating in price.
Even so, at this juncture, given the intermediate-term internal strength, I'd expect this initial decline to be short-lived and bought into. Key technical areas I would keep in mind are SP 500 20-day MA and January highs.
See a Chart SP below:
Click to enlarge
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