Construct the four-state price-volume rank before filtering it

Start with a four-state code

The price-volume rank is a four-value code for one sampling interval. It records whether price and volume rose or fell, not how far either moved.

Only the sign of each period's price and volume change enters the rank. The size of either change is ignored.

What each state means

The rank assigns 1 when price and volume both rise, 2 when price rises while volume falls, 4 when price falls while volume rises, and 3 when both fall.

State 1 is price up and volume up, treated as the strongest joint-advance state. The cycle reading treats joint advances as strength.

State 2 is price up and volume down, treated as a still-rising but weakening state. The cycle reading treats rising price with falling volume as a maturing-advance warning.

State 4 is price down and volume up, treated as the weakest, highest-pressure state. The cycle reading treats falling price with rising volume as the weakest state.

State 3 is price down and volume down, treated as fading downside participation. The cycle reading treats falling price with falling volume as waning downside pressure.

The same mapping, with two substitution rules

The same rank mapping is specified for any consistent sampling interval from intraday ticks to multi-year views, and for any instrument that reports both price and volume.

If price is unchanged, a related market's price direction is substituted. If volume is unchanged, the prior interval's volume direction is reused.

Exponential rank smoother

The rank series may be smoothed with moving averages or other filters. An exponential rank smoother is an exponential moving average applied to the discrete rank so the four-state series can be compared with a shorter average or a second smoothing pass.

One documented intermediate overlay is a 10-day exponential average of the rank compared with a five-day exponential average of that smoothed series.

Reversed stochastic on the rank

A shorter-horizon overlay applies a 5%K stochastic with 3%K slowing to the rank. The reversed stochastic flips conventional high and low conventions because a rising rank is defined as deterioration.

Under that reversed stochastic rule, a reading at or above 80 is a preliminary one-sided condition confirmed when the line turns down. A reading below 20 is the opposite preliminary condition confirmed when the line turns up.

A longer-horizon second smoothing

A longer-horizon construction applies a second 10-day exponential average to the first 10-day smoothing.

Cycle position is then read from the line's trend, linear-regression sectors, and reference level 2.50 rather than from discrete crosses. Reference level 2.50 is a midpoint on the double-smoothed rank used to mark a shift toward weaker longer-horizon conditions.