Breadth nonconfirmation as the gate for a volume fade and long-put case

The unconfirmed-peak gate

Market-breadth, in this archive, is a participation test. Advancing versus declining issues, and related volume measures, are used to ask whether a new price high is confirmed.

Editorial: the unconfirmed-peak gate is the point of the case. A market-breadth failure at a new high is what licenses a volume-price fade as a multi-name, time-boxed long-put hypothesis. Without that gate, the fade is not treated as open.

The 1989 unconfirmed highs

After a widely unconfirmed high dated September 1, 1989, the case treated the next decline as the second down-leg that follows a modest rebound from the first drop.

On October 3, 1989 the DJIA printed a new high at 2754.56 while participation and volume measures failed to confirm that high.

Comparison with the 1978 cycle

The 1989 structure was compared with the July 5 to November 14, 1978 cycle, when an upside-volume measure and a basic volume measure weakened while prices were still advancing.

Editorial: the comparison is structural. Weakening volume while price is still advancing is the same class of nonconfirmation later used on October 3, 1989.

The October 5 trigger

The afternoon of October 5 was treated as the trigger once a higher close looked likely while declining issues outnumbered advancing issues.

Editorial: that is when the unconfirmed-high is allowed to become the fade hypothesis. Price can still be on course for a higher close, but market-breadth is already failing.

Selecting the fade names

Candidate issues were those that had already retreated from cycle highs, whose volume had faded faster than the broad tape, and whose down-day volume exceeded up-day volume.

Selection used four constructed series: a signed-volume exponential average with smoothing 0.1, a market-volume exponential average with smoothing 0.03, relative price versus the NYSE with smoothing 0.15, and relative volume versus NYSE volume with smoothing 0.03.

The signed-volume-average adds volume on up closes and subtracts it on down closes. Relative-price is a smoothed issue-versus-exchange percentage change; only the direction of the line is treated as informative. Relative-volume is the smoothed issue-versus-exchange volume comparison used to judge whether participation is fading or returning.

The long-put vehicle

On October 5 the case opened equal-sized long puts on three names, adding one metals-group name to spread single-issue risk.

Editorial: the long-put is the defined-risk vehicle that makes entry, risk-spreading, and exit one testable procedure.

Exits that reuse the fade test

Later exits followed reversing relative volume and relative price, plus a volume-percentage-ratio nonconfirmation of a DJIA low, with the last position closed when only two weeks remained until expiration.

The volume-percentage-ratio is a tape measure used to test whether a recent low in the average is confirmed by volume behavior.

Editorial: when relative-volume turns back, the fade hypothesis is already invalidated. That is why the same test closes the long-put, rather than a separate price target.