FRED GOODMAN'S KEY INDICATORS FOR INVESTMENT SUCCESS
S&P 500 Price/Volume Oscillator
Monday, September 9, 2002
Fred Goodman
Volume is the key to this market, and this new indicator is the key to volume.

In my report for July 2, 2002, I introduced an oscillator based on volume. Throughout 2002 much of my attention has been directed towards volume, because I believe it is the key at extremes. And the market action has certainly been extreme for months. First as the market declined, then during the ensuing rally, and finally at the end of August, during a very volatile period.

To investigate the matter I developed the S&P 500 price/volume oscillator based on a very simple relationship between the total S&P 500 volume and its price. The S&P represents most of the volume traded on the NYSE. I have chosen the S&P 500 because of its popularity, it's very large capitalization, and most of all, it's stability.

The dark blue line represents the total S&P 500 volume. The green line is the volume multiplied by the price. The two lines were then normalized so they would be equal in value on November 24, 2000, the starting date of the chart below. The divergence between the volume, and the volume times the price, is then charted as the light blue line at the bottom.

I have drawn trendlines to show that there have been rather long periods when the divergence between volume, and price times volume, has progressively increased. There have also been long periods when they have converged. It appears that a breakout, following a long trend, may be useful in determining when a market is likely to reverse its situation. Certainly, in late July 2002, the disparity between the volume and the price adjusted volume was great.

This oscillator has swung between uptrend and downtrend, but each high was lower and each low was lower. I believe the chart looks as it does because of the fact that it takes fewer dollars to control large numbers of shares since the market had fallen so far since the highs made in 2000. As the S&P 500 has fallen, it has taken more volume to equal the same dollar amount. The oscillator measures the difference between the money being traded and the shares being traded. As the volume increased relative to the dollar volume, the oscillator declined. The oscillator will produce a buy signal when both the price and volume rise together.

S&P 500 Volume Vs. Price Adjusted Volume Through Friday, September 6th

Fred Goodman, CFP, is a fee-only Certified Financial Planner based in Los Angeles. You can send him your questions and comments via email at Fred@MarketMonograph.com. The charts and commentary represent what Fred is thinking about the market and thinking of doing for his own account and for accounts he manages. There is no guarantee that you will profit from trading as discussed herein. You may lose money and Fred assumes no responsibility for what you do or do not do with this information.