If you are regular followers of RM’s Market Breadth postings, you may have noticed the addition of two new tabs above the McClellan oscillator, one for the Volatility denoted by VIX and the other for declining volumes from the declining issues of the exchange.
At Vtrender, we are great believers in the MCClellan Readings with levels under zero pointing to a seller dominated market and above zero pointing to a market driven by buyers. Besides levels of -80 and below and + 80 and above have been great reversal points and generally signal a pause in the downtrend/ uptrend if not the beginning of a swing term reversal. There are also divergences, which make the art of reading the market through the McClellan simpler.
The addition of Vix and Declining volumes is to get more evidence of a market about to turn.As a rule, the Vix and the market tend to follow opposite paths, but even die-hard Vix fans will accept that the market does not always go opposite to what the Vix does every day.The reason is that many times the declining volumes of the index overrides, the action of the Vix and it is perilous to make an assumption on the index only on the action of the Vix.
Check this chart out, courtesy RM :
The charts is of the Nifty spot with declining volumes (as a continuous line in red) in the pane below, followed by the vix in blue below that and finally the McClellan oscillator in green in the last pane.
The MCClellan oscillator is at -41 as of the close yesterday, firmly in negative territory but sporting a minor positive divergence to price.
I have marked 4 points in the chart : A, B, C, D in yellow boxes.
Whilst looking at these points, lets’ remember that the VIX and declining volumes should move opposite to price. If price is decreasing and declining volumes are increasing, then the down move will accelerate. On the other hand if price is increasing and declining volumes are also increasing, then the up move will in all probability fail.
Point A : Spot near 5900. Note the position of declining volumes and Vix also marked A
Point B : The market has fallen from 5700 to 5600. The vix also falls, but declining volumes are going up.The declining volumes rectify the anomaly in the Vix here.
Point C : A up-down swing of 100 points is captured through declining volumes, whereas the Vix is flat to negative
Point D :The up move of friday seems right, as vix is down, declining volumes are down and price is up.
As a rule, read Vix along with declining volumes.
The Market Breadth charts posted By RM continue to be fantastic indicators of broader sentiment in the market.