Pump up the Volume, stock volume that is!
Volume, the amount of shares traded in a stock, ETF or Market Index over a certain period of time (Minutes, Hours, Days, Weeks or Months). Volume is the buying and selling footprint left behind by investors.
Recall in a prior post and in my Active Investor course, that I mentioned 70+% of all buying and selling is due to the Institutions (Mutual Funds, Hedge Funds, Banks and Pension Funds)? These Institutions do not announce what they are buying or selling until they are either completely in that particular investment and/or especially out of a particular investment. With a little study and observation though, we as DIY investors can watch, read and react by studying the price-volume action. They cannot hide it and we can profit from it just like they do.
The interplay of Volume and Price movements is a key ingredient to understanding the psychology behind a stocks move. Big volume when a stock breaks out of a base or through prior resistance is a telltale sign that buyers have won and excitement about the company’s future looks promising.
Volume clues on the way up and especially near tops and bottoms are huge reasons to pay attention to what is ACTUALLY happening according to supply and demand, psychology and market sentiment, NOT opinions.
Understanding the relationship between Volume and Price action both in the overall market and individual stocks is what leads to getting in at the most opportune time and getting out before “the you know what” hits the fan!
Here is a basic overview of two scenarios: After a correction or Bear market, the Market or one of the key indices will rally, in the next 4-7 days, the market will explode in price action (to the upside) and have huge volume. More volume than the day before. As I said, the day should feel like an explosive exciting rally. This is proof that the Big Boys are buying and driving the market higher. I’ve seen many rallies that go up but on weak volume and very little progress for a few days, only to turn tail and sink even lower than before. It takes some study but when you look at past market bottoms you will begin to see these “follow through” days. With a little study and observation, you will notice the difference.
Scenario Two: A stock that you’ve been watching for awhile has been trading in a range, say between $40 and $50. Finally, one day the stock breaks higher and shoots above $50. The real key is the volume. Is it on normal everyday volume or is it 100-200%+ compared to its average volume? This makes all the difference.
A basic overview of how price and volume should work together is as follows. By the way, this applies to an Index or a stock. As we’ve already talked about, when a stock breaks out or an index bottoms and has a follow-through day, the volume should explode on higher than normal volume. The higher the better. As the index or stock advances, the volume should be higher on up days and lower on down days. This tells us that the index or stock is being accumulated. This is how a healthy stock or market should perform.
When the Stock or index sells off, has a “correction” or just your garden variety down day, the volume should be lower. This tells us that institutions are not selling and holding on. Again, this is healthy.
Eventually an Index or stock will get tired and one of the clues to look for again is the relationship between price and volume. I cover many more clues in my class but here are a few:
One; a stock or index will move higher but the amount of shares traded continues to decline. This is a clue that the buying is drying up and we may be in for a decline or at the very least a pause.
Two; the price spread of the day is very narrow but the volume keeps getting bigger. This is telling us that all of a sudden, the buyers and sellers are equal and sellers may soon win out.
Everything was normal up to this point, up volume on up days and down volume on down days and all of sudden, the Price/Volume relationship changed. It doesn’t take a lot of work to observe these “signs” but to disregard them is financially costly.
There are other telltale signs but notice how much we can tell about what is going on in a stock or an index be observing the Price/Volume action.
I hope this is another Tool that you can use when identifying Stocks to buy, sell or eliminate from your watch list. As always, narrow your watch list to a few good stocks at any given time and only buy the best “Merchandise” available, Super Stocks!
Super stocks are just that, “Super”. Any stock out there can meander along with average price movements and average volume. We look for extraordinary characteristics. Exploding volume is no exception.
Until next time, Be the smartest Investor in the room.
Welcome to the Nerdery,