Volume Speaks Volumes
Stockscores.com Perspectives for the week ending September 29, 2007
|
| Upcoming Events |
Stockscores Canadian Tour
Victoria
Vancouver
Edmonton
Calgary
Toronto
Ottawa
Winnipeg
For information and to register for these free trader workshops, click here
|
|
In this week's issue:
I have said many times that the stock market is a war between buyers and sellers. Buyers win the war and the stock goes up, sellers send the stock lower when they are in power. It may seem that each side operates in the exact opposite way in the market, but the truth is that they actually gain their power differently. Understanding the difference is important if you are to be a successful investor.
The explanation of how they differ is best explained by Physics. We are all familiar with gravity, aside from the occasional pop star or debutante, most of us are grounded by it. We know that to go up requires some sort of power, but coming back down is easy, gravity does the work.
The same can be said for stock prices. Going up requires power, coming back down can happen all on its own when the power is gone.
In the market, volume is power. It is the thrust that buyers need to overcome the gravitational pull that sellers use to their advantage. When there is volume behind the buyers, sellers have little hope for winning the war.
Consider what the TSX Venture market did over the last year. Until July, it rallied steadily higher, trading more and more volume as it went up. Buyers snapped up stocks that had little in the way of fundamentals to justify their price, but it did not matter, because the buyers had volume on their side. Then, in August, the credit crisis in the US touched of a moment of panic for the buyers and the volume went away. Nothing changed fundamentally, but the absence of volume initiated a 25% sell of in the TSX Venture market. Gravity worked.
The opposite has happened over the past month after the August correction. Buyers have come back to Technology stocks, particularly those with the potential for access to global markets. The volume has been strong in these stocks and buyers have pushed that sector of the market upward.
Think of the global economy as a giant pool of volume, which is often referred to as liquidity. The money that is exchanged has limited places it can go, but we as decision makers have the choice of where to funnel it. Until 18 months ago, the favorite place to funnel money was real estate, and that market enjoyed it best upward trend in memory. Then the liquidity left the real estate market, much of it destined for the stock markets of the world.
What this has meant is that, despite the many weaknesses in the US economy, money has been pushing stocks higher. We have seen corrections motivated by fundamental problems that could very well have crippled the stock market and sent it lower on gravity's elevator. But, each correction has been met with volume, the buyers stepping in to end gravity's brief victory. Like a stunt pilot in a tail spinning plunge toward earth, the power of the buyers has pulled it out of the drop and sent it back up toward the clouds.
Here is what everyone needs to take from this analogy. Buyers need to go where the volume is. If you want to have great returns, follow the volume. September was the best month in history for commodity prices, volumes have been high and price gains significant. The buyers have been winning the war in energy, gold and other commodity prices handily.
When I look for opportunities in the market, my first focus is on volume. I use the Stockscores Market Scan tool to find stocks that are trading with abnormal volume. Where there is abnormal volume, there is the power to take a stock higher.
However, it is not enough to have volume, you need to look ahead and think about where volume may dry up. On a stock chart, this is at points of resistance, past price levels where the buyers have lost control to the sellers. Previous points of inflection in the market are coded in to the memory of buyers and they will tend to back away from their buying sprees when stocks get to these price levels. Back away means no volume, no power, gravity has its chance to work.
There are other things that can cause gravity to take hold of stocks. The most important, and a good reason for short sellers to take note of a stock, is when stock prices go far beyond the company's fundamental value. Again, volume is the key because prices will go up too much when investors are emotional. Emotion tends to occur when volume is at its very highest.
Stocks that are trading extremely high volume and whose upward trend lines resemble a parabolic curve are moving higher on emotion. It is a lot like our stunt pilot friend who pushes his plane higher and higher until the engine stalls. The trend runs out of power, and the sellers quickly take the stock back to rationality.
There is more to making money in the market than just understanding volume. However, the failure to appreciate volume can leave you one important tool short when working to predict future price moves. When analyzing stocks, keep it in mind.
Back To Top
I ran the Stockscores Simple Market Scan on the Nasdaq market, looking for stocks that were breaking from sideways trading rangesBack To Top
1. ECIL
ECIL has been building upward momentum over the past four months but Friday was the first day when the stock caught some really strong volume and broke out through resistance. I would put support at $9.30 and upside potential is to $12.
Back To Top
2. POWL
POWL has also seen increasing volume over the past week, with very high volume on Friday. The stock closed at a new high and the buyer have been in control for the past two weeks after a long period of sideways trading. Put support at $34, a close below that would be a negative for the stock.
Back To Top
References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
Back To Top
|
If you wish to unsubscribe from the Stockscores Perspectives Weekend Edition or change the format of email you are receiving please login to your Stockscores account. Copyright 2006 Market Perspectives Inc.
|
|
