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FRED GOODMAN'S KEY INDICATORS FOR
INVESTMENT SUCCESS
I have become intrigued with the effect on the Price/Volume loops that the different days of the week have. We know that Mondays have been the lowest volume days of the week (over the last several months), while Fridays have also been below average. The three days in the middle of the week are big volume days, so the Price/Volume patterns are dependent on the days on which they happen to fall. One way around this is to use 5-day moving averages of both price and volume, rather than plotting each individual day, and we sometimes post these long-term charts. However, they develop patterns much more slowly, and can miss a move as a result. This got me thinking about a possible compromise, and I came up with the idea of normalizing the volume according to the day of the week. First, let's look at a recent Price/Volume Chart of the Dow without any normalization.
Now, let's normalize the volume. To do this I computed the average volume for each day of the week over a period of three months and divided each day's average into the average of all the days. So, for example, since Mondays have low volume, the constant for Monday was the highest of all, at 1.13. Then I simply multiply Monday's volume by 1.13 before using it in the Price/Volume Chart. Thursday has the highest average volume so its multiplier came out the lowest, at 0.93. The chart below is the result of the calculation and it came out quite different than the one above, which was drawn in the normal way. Notice that the buy loop at the bottom of the chart above completely disappeared, but the present potential sell loop exists in both charts. In the chart below the potential sell loop has changed from the basic sell loop in the chart above to a bearish counterclockwise false reversal.
Now certainly I am not going to elevate this new technique to the level of one I have been using for over 30 years without a lot more study, but I admit to being excited by its logic. It has been disturbing to me to be dependent upon the day of the week on which a move happens to occur. It is much more reasonable to me to look at the relative change in volume rather than the change that happens to result because a bunch of traders like to sleep in on Monday morning. 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. 
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