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Volume Spread Analysis – FTSE 100 16th March 2009

FTSE 100 Daily Index Chart

FTSE 100 Daily Index Chart

I wanted to share this chart with you, as it is a trade I am suggesting for this week, and the analysis is based on a combination of volume spread analysis and Japanese candlesticks – the perfect combination of the Western indicator reinforcing the Eastern Japanese candlestick, and don’t forget you can find the latest live currency charts, index charts, fundamental news, and latest currency news in the navigation bar above, along with help in finding a good ECN broker.

If we look at the volume, the first point to note is that the index is going up, and yet the volume is falling which in volume spread analysis is always a warning signal. When a market rises then this should be accompanied by rising or increasing volume, and equally when a market falls, then this should also have increasing volume. To move a market takes effort ( whether up or down ) and if the volume ois falling, then this suggests that the move is running out of momentum for the simple reason that the market makers are no longer participating in the move. The market makers are the professional money, and the one activity they cannot hide is volume, which is why we use it as one of our primary indicators when studying markets which provide true volume. The market makers will take every and any opportunity to catch you out, but provided you use volume spread analysis techniques combined with your chart reading skills, you should always have a good idea of what they are planning next!

In this case we are seeing a move up, on falling volume which provides us with the first early warning signal that we may see a reversal in the trend shortly. The market makers are not taking part, and nor should we, but instead start to look for a selling opportunity. Friday’s candle provides the ideal signal – a shooting star after a rally, suggesting weakness to follow. The daily price has tried to rise, but falling back on selling pressure in the market. The market makers are withdrawing and not buying into the upwards move, and the price on the candle has failed to penetrate the resistance immediately above indicating weakness. If we do indeed see prices fall on Monday then this candle will be a classic morning star, three candle reversal. Finally in the last two months we have seen a series of lower highs and lower lows, of which this could be the next, again adding weight to our analysis.