The following is an excerpt from the September 27, 2013 blog for Decision Point subscribers.
Markets have been running with lower than normal volume for quite some time, but this week I noticed that the Dow Jones Industrial Average (DJIA) was running with only about half its 250-EMA of volume, and I wondered if there was some technical significance to this fact.
On the chart below the last four day's volume stands out as being consistently very low. One technical interpretation would be that the accompanying price decline is not serious because there is not a lot of participation, but that's not it at all. The real reason is that three DJIA component stocks were replaced at the open on Monday.
A quick review of average volume (50-EMA) reveals that the three new stocks trade at significantly lower volume:
New Stocks
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GS 3.4 million shares
NKE 4.5 million shares
V 3.7 million shares
Old Stocks
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AA 20.6 million shares
BAC 92.3 million shares
HPQ 15.5 million shares
The difference is profound. The old stocks trade at eleven times more volume than the new stocks, and the low DJIA volume this week doesn't mean anything technically. This is good to know if you give volume a lot of weight in your analysis. This week's DJIA volume represents the 'new normal' for this index, and comparisons to earlier volume levels is not valid.
Technical analysis is a windsock, not a crystal ball.
