The Smart Profits Report: Issue #200
Thursday, April 14, 2005 Volume: Reading Volume to Find 20% Gains... In 45 Minutes
By Mt. Vernon Research Team
Mt. Vernon Research Pundits need to talk about something, and a favorite on the daily market commentary circuit is reporting "who's in charge." Some days the buyers are in control. Sometimes sellers rule the market. Every day, every trade has two sides and both sides are in agreement. How can anyone be in charge? This is an important question when it comes to trading, because technical systems are based on the idea that you can spot whether buyers or sellers have control. Without knowing that, you couldn't tell whether a stock was likely to head up or down - and you certainly couldn't survive the options market without knowing that, which brings us to volume. Sometimes when you look at a chart, it will be quite obvious what is happening. The prices are clearly trending upward or downward. But then for some reason, with no real news, the price line will start going the other way. Instead of continuing upward, the bullish chart turns bearish. Instead of falling closer to zero, the bearish chart gets bullish. Maybe what was clear wasn't so helpful, after all. Reading Volume - A Quick Trick for Identifying Trends Very often the astute technical analyst could have told you that change was about to happen. There are lots of methods for detecting these "buying and selling climaxes." Candlestick charts have dozens of patterns. Regular charts have well-known formations like the "head and shoulders" top or "inverted head and shoulders" bottom. Point-and-figure charts will meet their targets. A stock might cross a moving average. There are literally hundreds of specialized technical systems that will give signals, not to mention discrepancies between signals that have meanings as well. But if you want a quick take on whether a trend is still strong, the best clue will be in volume. That's where I would advise the beginning technical trader to focus. For instance, Priceline.com (Nasdaq: PCLN) has been bullish since early February. But in late March, its usual choppiness looked like it was turning into a serious change of direction. The stock was trending down consistently. For seven days it was dropping, all but once closing lower than the day before. Was the bull run over? Had the sellers taken charge? The chart direction looked very much as if that was the case. But if you looked at the volume, you would have drawn an entirely different conclusion. During that whole period when the price was falling, volume was growing weaker and weaker. Finally, hardly anyone was coming out to play. The daily volume was only a third of normal. That was a good sign that selling pressure was drying up. Those who wanted to sell at whatever price they could get had largely sold. At this point, on Friday, I sent out a bulletin to my trading service to take a call on Priceline. The chart was still dropping, but my reading was bullish because of the weak volume. About two hours later, the stock had turned around - hard. At 2:30, the stock that had been dropping 10 to 20 cents a day did an about-face and rose $1.50 in the next 45 minutes. Needless to say, the option responded with a big spike, too, gaining 20% that fast. Generally, Right Is Good Enough There was luck involved in that trade, I'll admit. It was mighty darned lucky that I decided to finish writing the bulletin before going down the street for a cup of coffee! I'm not kidding, either. I could not have pinpointed that the change in direction would come at precisely 2:30 p.m. that very day, or even by the next day. Nor did I think it would get so big so fast. But I would have called it an 80% probability that the change was coming fairly soon. The chart had already told me the basic story. Sellers were tired. The stock was dropping weakly on lower and lower volumes, and it was time for the buyers to come back home. The next time you are tempted to buy a stock that has been rising, be sure the volume still supports it. And if you are thinking of selling a stock that's been falling, make sure you're not the last seller. If the volume has gone too low, you'll probably wish you'd held on. Good Trading, Mt. Vernon Research Team Today's Smart Profits CribSheet - For more on volume in the markets, check out Smart Profits #273, Common Option Mistakes: Four Options Resolutions to Make Today.
- Check out our Smart Profits Glossary, chock full of over 150 option terms, like "volume" & "straddle."
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