This is a daily bars chart of SPY, the etf that tracks the S&P 500 index, since late Dec.

This is a daily bars chart of SPY, the etf that tracks the S&P 500 index, since late Dec. ‘08, overlaid with several volume indicators.

In my previous blog post, I showed that in the short term SPY has broken above resistance and appears to be in a strong uptrend, likely to exceed its previous high of 108. But now let’s look a little longer term since the March low and see what some volume indicators are telling us about the behind-the-scenes strength of this uptrend.

Volume up and down days

In the top pane we plot a pair of indicators that show volume on up days as compared to volume on down days. These curves are trailing 22-day moving averages of volume on up or down days, so there is some lag in them. Typically, the red curve is above the green during downtrends and the green is above the red in uptrends. But when the reverse happens that’s a leading indicator that the “smart money” is fading the trend, going the opposite way from the crowd, a leading indicator of future price movement. The red curve was strongly above the green during the steep down trend prior to March, and it persisted above green for the first month of the new uptrend, but that persistence was due only to the lag in the indicators. During March, you see the red curve was flat, while the green was rising, and by the end of March, they were positioned as expected in a strong uptrend.

But, from June through August, the two curves meandered across each other, instead of the green being clearly above red. This indicates that the “smart money” people may be loosing some conviction.

Starting in September, the red has opened a large gap above the green. This is very significant, showing that the “smart money” is strongly heading for the exits, a leading indicator that this uptrend is coming to an end.

MPVT indicator

In the middle pane, overlaid on the price, is the purple curve, the Modified Price-Trend (MPVT) indicator, which is an improved version of the On-Balance Volume (OBV) indicator, which has much less noise in it than the OBV. When the “smart money” people are going with the price trend, this curve will also follow the price, but when this curve diverges from the price, it’s saying the the “smart money” is heading the other way, a leading indicator of the end of the trend.

After following the price closely from March through June, notice how, in early July, the MPVT held significantly above the price. That showed that the “smart money” wasn’t as pessimistic as the crowd was, and indeed, a new uptrend started in mid month. Since then, though, the MPVT curve has been drooping below the price curve. This is not a true divergence (yet), since it is still making higher highs as the price is, but it is a soft indication that some some strength may be ebbing away from this uptrend. Although the MPVT is still making higher highs, it is making lower lows while the price is still making higher lows, and that is a kind of downward divergence.

I’m expecting that, over the next few days, price will go on to a new high; it will be very important to watch to see if the MPVT also makes a new high, or if it’s peak is below the mid-September peak, which would be a true negative divergence, a strong leading indicator of the end of the uptrend.

Volume-weighted MACD and histogram

In the lower pane are the volume weighted MACD (black curve) and the volume weighted MACD histogram (green). Notice how the MACD followed the price up through early May, but from early May to mid June it formed a significant downward divergence from the price. That was the leading indicator of the brief downtrend from mid June through early July. Now, from early August

through mid September, we’re seeing another significant downward divergence from price, most likely a leading indicator of a new downtrend.

Bottom line

In summary, all of these volume indicators are pointing to an end of the current price uptrend, sometime in the next few weeks to month or two.

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