I’ve been expecting to write this post for a while as I waited for a day with a clear… non-signal in the XBP Volume Ratio; and finally it happened on Monday the 4th of June 2018:
As we discussed so many times, the most powerful signal that an oscillator gives is the divergence with the price action. As XBP Volume Ratio is a leading indicator, it can “predict” what will happen with price. But what if there is no signal? What do we do then?
On this trading day, around 10:00am NYSE time the market topped and started a decline. XBP Volume Ratio didn’t have any divergence signal that we could use. In cases like this you can either ignore the indicator or check where the indicator value is coming from, i.e. check the indicator context. As you can see in the screenshot, XBP Volume Ratio touched the 80 (percent) line and then started to decline. This means that there was a majority of buying volume that could lead to an overbought market. Then XBP Volume Ratio starts to decline and when price crosses the Hull Moving Average XBP Volume Ratio is far from the bottom line of 20 (percent). In cases like this, just follow price.
Also, if we check the context of price we can see some clues. We can see how a high volume bar (blue) occurs at the very top of the market, and how price crosses the always important Support and Resistance level of the overnight High/Low (dotted purple line). Seeing this action, we shall have no doubt that price is bound for a decline until opposing signals start appearing.
Is true that sometimes this kind of scenarios are not as clear as this one here, but as we want to learn from clear examples to see more difficult ones with a bit of practice.