Constructing a rate-complex volume-breadth index

Price first, volume as a check

In this construction, price is the default research input and volume is positioned as a participation check. A price move is treated as supported only when volume is relatively adequate. Relatively thin volume is treated as a possible warning that the move may not continue.

That pairing is volume-price-analysis: the price path and its volume participation are read together, so a move is treated as supported only when volume confirms it and questioned when volume does not.

Select sleeves that publish volume

The composite is assembled to represent both ends of the yield curve plus a credit-risk sleeve. Rate futures are combined with a utility-stock index and a 20-bond index so chart work can be applied to a series that also carries volume.

Component-weighting and the futures average

Component-weighting applies fixed multipliers so raw price level and volatility differences do not dominate the composite. The stated weights are 50 percent of the utility index, 100 percent of the 20-bond index, 200 percent each of long Treasury-bond futures and 10-year Treasury-note futures, and 100 percent each of Treasury-bill, Eurodollar, municipal, and five-year Treasury-note futures.

To limit futures convergence near expiration, the construction uses a front-two-month-average. It averages the front two contract months and rolls that average forward, then reweights raw prices to offset differences in level and volatility.

On-balance volume on each sleeve

On-balance volume is a running total that adds a session's volume after an up close and subtracts it after a down close. In this tape that total is computed on each component.

A sequence of higher highs and higher lows is treated as constructive confirmation. A sequence of lower highs and lower lows is treated as negative.

Turn the paths into a vote count

Market-breadth of the complex is a daily vote count across the eight sleeves. Each bullish short-horizon or long-horizon breakout is scored plus one, each bearish breakdown minus one, and an in-between market zero.

The signal-tally is the continuous sum of those volume-signal votes. It theoretically spans plus eight to minus eight and is plotted against the price composite.

The confirmation reading rule

The explicit reading rule is that a move in the price composite should be matched by a corresponding move in the volume-signal tally. The long-horizon tally is then cross-checked against a thirty-day-average-overlay, which is a 30-session moving average of the composite.

Recorded confirmation tests

Chart notes record a January 1988 double top in the composite without long-horizon confirmation, and an April 1989 break of March lows that was unconfirmed by the long-horizon tally.

They also record a January 1990 case in which both the composite and the long-horizon tally were weak together, and a late-1991 long-horizon sell reading that reversed after a discount-rate cut.

The 1992 look-ahead described the composite running well ahead of its 30-day average while the long-horizon tally failed to make new highs. That pattern was read as more consistent with yield consolidation than with a further decline in rates.