Grading volume and open interest after moving-average crosses

The cross does not classify the move

After a close through a moving average, the same cross can mark either a pause inside the prior trend or the start of a reversal. The cross by itself does not classify the move.

How the average ends a swing

A 13-day moving average marks reactionary lows and highs. A close above the average names the lowest price from the period below the average as a reactionary low. A close below the average names the highest price from the period above the average as a reactionary high.

An advance is the path from a reactionary low to the next reactionary high, and a decline is the path from a reactionary high to the next reactionary low. Swing volume is the average daily volume over that path, and open-interest growth is the largest increase recorded on that path.

In this workflow a moving average is a lookback average of ordered closes that timestamps reactionary highs and lows and marks when a defined swing has ended.

Volume and open interest

Average trading volume during a price swing is treated as a measure of how much new information is being discounted. Larger volume is read as a stronger force that is more likely to reappear later.

Open interest rises when a new long and a new short are created together. A larger open-interest increase during a swing is treated as a stronger force that is more likely to reappear later.

Volume-price analysis compares a swing's average daily volume with a historical sample of swings so a charted price break can become a checkable continuation-or-reversal hypothesis. Open-interest analysis measures the largest open-interest increase during a defined swing and ranks that expansion before a continuation or reversal plan is chosen.

The swing strength grade

A swing is graded strong when both its average daily volume and its open-interest growth exceed those of 70 of 100 randomly selected swings from the prior 10 years. A swing is graded weak when both sit below 70 percent of that sample. Otherwise the swing is graded as neither.

That three-way label is the swing strength grade.

A strong decline classified as a correction

In the Treasury bond decline from a 116-12 close on 3 December 1996 to a 112-14 trough on 18 December, average daily volume of 411967 contracts and open-interest growth of 22135 contracts both exceeded the sample cutoffs of 339000 contracts and a 16750-contract open-interest increase. The later close back above the 13-day average was classified as a correction.

A weak decline classified as a reversal

If that same decline had posted volume of 222222 contracts and open-interest growth of 4444 contracts, both figures would have fallen below the matching sample cutoffs of 258000 contracts and a 5100-contract open-interest increase. The close back above the average would have been classified as a reversal.