Secrets Of $NYUD

There are often times when patterns on charts just get so confusing that even when we make a plea to the more common indicators for guidance, we find that they too offer little in the way of direction.  And then we have cute little incidents like the mini-flash crash in the ES futures that occurred on Thursday, Dec. 20th which took all of 2 seconds to cause the circuit breakers to trip and put a halt to trading due to a "limit down" event.  And of course all that excitement prompted Zero Hedge to quickly publish one of their patented bullhorn specials explaining How 10,000 Contracts Crashed The Market.  It didn't help much that at the time of this mini-crash event the clocks in Asia had already ticked over to the dreaded Mayan "time to pay the piper" date.  Surely the crooks who run the world were having the laugh of their lives at the sheer 'coincidence' of it all?

But then something funny happened on the way to the Forum.  Or should I say "didn't happen".  The markets opened on Friday morning with the majority of investors all around the globe expecting a minimum of 30 down points on the S&P 500 and the evaporation of 300 Dow points.  I even had visions of such a bloodbath myself.  Silly me.  Because what happened next was... well... nothin' basically.  Apparently somebody came to the rescue and all was well on Wall Street.  We survived the week and the world didn't end.

But let's take a closer look at what "really" happened all day long on Friday.  We begin by first taking a quick look at the mini-crash itself as seen on a 'still photograph' of the futures at the time of the crash as displayed at ForexPros.  [Helpful hint #224: click on any of the Indices you see in the Index column.  Once it opens, select the link to "interactive chart".  From there you can create the time frame of your choice on any of them.]

Ok, to begin our little investigation and analysis on just what exactly transpired during on Friday's apparently lackluster trading day, let's back up a bit and see what that mini-crash looked like:

Click on image for a larger version

Obviously as the clock ticked down toward the open of trading on Friday morning, it seemed apparent that all hell was about to break loose on Wall Street.  But surprise surprise, that's not what happened.  In order to provide a snapshot of the trading activity that occurred during Friday's session at the NYSE, and in order to relate it to the chart above, we take a look at a 5 minute chart of the S&P 500 in approximately the same time frame:

Click here for a larger version

As you can see, after the initial gigantic burst of volume during the first 60 seconds of trading things settled down very quickly.  Stick save in action.  Notice that volume dried up almost instantly as the market commenced to churn sideways for the remainder of the day.  Even the silly Russell 2 million put on a very brave burst in the closing minutes of trading... something I'm always more than ready to mistrust in light of the fact that the Russell is one of the favorite playthings of the venerable JPM theft machine.  In the chart below we see how the mighty Russell finished the day [please note that in order to provide you with intra-day volume data, in this case an extremely important metric, I have to use IWM as a proxy]:

[Please also note that on the charts below, clicking the charts themselves will enlarge them.  Clicking on the link below the charts will take you to real time data.  In a few days the following charts will be far enough into the past that they will basically no longer be useful.  But by clicking on the charts themselves, the image will be retained]

Click here for a larger version

Here's where this particular little study, one using about as small and sharp a focus as I ever employ, gets very interesting.  Note that as was the case with the $SPX, there was of course a huge spike in trading volume in IWM at the opening bell.  And as was also the case in the S&P, after the initial opening shock, volume dried up as the session evolved into one of those typically aggravating days of sideways chop.  But  what we were actually witnessing (in my humble opinion) was one of the largest offloading sessions by the big banks that we've seen in many moons.  Call me skeptical, but in light of the information you're about to see in charts below, as it was happening in real time I was not the slightest bit impressed with the volume spike seen in the chart above for IWM.  It is afterall one of the tools that JPM does in fact use in their daily arsenal to create smoke screens.  In fact, barring some sort of super impressive explosion higher in today's session, the last one before Santa arrives to use your toilet without permission, I believe the data shown in the charts below is a precursor to more downside action.

For those not familiar with $NYUD, it is a method of keeping track of volume by subtracting down volume from up volume.  The net result is a print that is either above the zero line (more up volume than down volume) or below the zero line (more down volume than up volume).  I keep this chart open every minute of every trading day but only have to refer to it a half dozen times throughout the session.  The reason is this: $NYUD has a proven track record of being extremely honest.  In the first 60-90 minutes of the trading day, the vast majority of days it sets the tone for what volume is going to do for the remainder of the session.  Once $NYUD has established its general trend in the first hour or so, it is extremely reluctant to change course.   Secondly, once the path has been established for the day, almost without fail there will be a huge volume burst in the final few minutes of trading which 'finalizes' that trend for the day.  Thirdly, and most importantly, on the rare occasions when we see the price action close in the opposite direction as $NYUD suggests price 'should have gone', it is $NYUD that speaks the truth.  The following day price will be proven to have been the liar and the vast majority of the time price will pay dearly for its sins.  Of course no indicator and no analysis is foolproof, but I've seen enough evidence of these phenomena that I have little choice but to go with the odds... they suggest Friday's action was a well crafted smoke screen.

We begin by looking at a 'typical' picture of what $NYUD would normally look like.  In the chart below the white line represents the entire NYSE ($NYA):

Click here for a larger version

Ok, here's where we get to the nuts and bolts of this analysis that I felt compelled to share with you today.  In the chart below we note that on Friday past, we saw the largest divergence in a long, long time between $NYUD and the price action in the indices, particularly that pesky IWM.  I almost think that I don't even need to explain the chart below any further, except for one small detail... I forgot to draw a couple of lines highlighting the divergence I refer to.  Nonetheless, you can still see that amazing occurrence in the image below:

Click here for a larger version

And finally to put Friday's divergence event into proper perspective, we take a look at how huge the down volume actually was when compared to what has occurred in recent months.  It's quite clear that this was an event that was very rare indeed.  I've broadened the time frame to 3 months+ in order to provide a snapshot of exactly how enormous the disparity was between down volume and up volume, not to mention that all of it was in direct divergence with price action.  One of them was lying:

Click here for a larger version

One important aspect to note is that each bar in the chart above covers 2 hours.  There is no overlap in those last 4 candles which provides further hints suggesting that it was an 'impulsive' event of massive down volume.

And finally, although we have seen days in the past with much more down volume, it is very rare that the market can make its way through the day by heading higher as it did on Friday.  Here's a picture of Friday's action as seen in a daily chart covering a year and a half:

Click here for a larger version

In conclusion, let me be the first to admit that I'm the king of the crow-eaters.  My younger brother and I used to kibitz each other (God rest his soul) about which of the two of us was more likely to end up with egg on our face any time we made some sort of claim that seemed even the slightest bit outlandish.  But whether the market bursts higher today and tries to make a liar out of me or not... I'm sticking to my guns on this one.  It's entirely possible that with what will most likely be a very small volume day today, the market could indeed burst higher.  But if volume does indeed end up being minuscule, I'll discount it.

In any case, this particular analysis is very valuable most of the time... and is something so worthwhile knowing that I'm more than happy to share it with my readers and followers.  In other words, on this particular occasion I'm willing to take one for the team.

And this time I can say with confidence that this IS the last piece I'll publish before Santa gets here.  So on that note I'd like to wish each and every one of you a most wonderful and happy Christmas.

Click here for your Christmas gift courtesy of Albertarocks