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Sunday, September 19, 2004
Market Recap
It was a mediocre day for the markets on Friday as options expired on a quadruple options expirations day of trading. All three big indices closed in the green with the Dow up +39 points, the NASDAQ up +6, and the S&P up +5 points. The Dow closed just below its 200 SMA on Friday and like the NASDAQ, it is floating around between its 50 and 200 SMA's. The charts of these big three are turning bullish, especially the S&P. On the surface, the NASDAQ only finished up +6 points but as you will see in tonight's chart, it closed with a bullish hammer on Friday with above average volume and a small bullish flag pattern beginning to form on the chart. With some good news, the markets should begin a pre-election run-up soon. This is what the charts suggest at least. With just six weeks until the big election, the market should start to show us its hand soon.
Volume Revisited
Occasionally I receive requests for a specific commentary. Lately, the ‘volume' of requests has been to discuss volume again. A previous commentary on volume (‘Turn up the Volume') can be found in our Topic Index under the section on indicators.
The main point behind ‘Turn up the Volume' was the use of volume for confirmation of movement in a stock. If a stock is hitting an intra-day high, but the volume is not there, we know that the gains will probably not stick. Likewise, a stock that is declining but doing so on very modest volume will probably not stay down for long. We commonly refer to action like this as a ‘shake out'. Some shareholders will not pay attention to volume; they will panic and sell, only to see the stock climb back up to and past the previous day's close. Shakeouts are how professional traders get the crowd out of a stock just before positive news or event.
Tonight, I will discuss volume a bit more in depth. Many of the questions ask how we know when the volume is looking very light in the case of a shakeout, or very strong in the case of a breakout. This is an excellent question, and a point many people can find confusing.
The stock market opens at 9:30am and closes at 4pm. That gives us 6.5 hours of trading each day. Let's round down to 6 hours, to make our calculations a bit easier (and if you are like me and rarely trade in the first 30 minutes, then we are left with a 6 hour trading day.) We need to know how much trading time has passed in a given session gauge how the volume is looking. We also need to know about the stock's average volume. It is important to know the stock's long term AND short term average volumes. The short term average volume tells us the most recent activity. The long term average volume tells us what the stock is capable of based on past volume. Sometimes, I will avoid taking a position in a stock simply because of the long term average volume. We do not want to get caught in a stock that spikes on millions of shares, but normally trades only 100,000 or less. This is how people get stuck in positions; TPPP is a classic example of this situation.
Calculating Volume – Intraday
There are 6 hours in a trading day and XYZ has an average volume of 2 million shares. We can now do our calculation. In order to have an average day, XYZ must be trading 330,000 shares an hour. If it is 12pm (2 hours into trading – discounting first 30 min) and XYZ has traded only 200,000 shares, we know that volume is very light. If a stock on our watch list with a good chart is declining on this light volume, we may want to use this as an opportunity to buy the dip.
Likewise, if it is 12pm and XYZ has traded 800,000 shares, we can see that volume is quite solid. Not quite breakout/breakdown volume, but it is worthy of keeping an eye on. I say ‘breakout/breakdown' because you also need to pay attention to which way the stock is heading. If this volume is to the downside, then, we stay away from the stock or look at it for a possible short entry.
Breakout Volume
In order to determine if a stock is breaking out, look for at least 2 times the average volume. In our example, XYZ would need to trade 1.2 million shares in the first 2 hours to get my attention. This is not an exact science; if XYZ has traded 950,000 shares and it is moving, then we can probably assume that it will continue to move. Volume is usually strongest in the last hour of trading if a stock is on the move. This is because investors want to get into it before a possible continuation rally the following day.
Caution on Volume
One cautionary note on volume: When there is a big news release before the open, stocks will sometimes trade their entire average volume in the pre-market or at the open. When a stock runs like that before you have a chance to get in, please do not chase it. Yes, it is breaking out, but if you jump in those first 30 minutes, you may wind up seeing the stock pull back significantly. Many times, stocks will gap up and run right out of the gate. The crowd is desperate to get shares and will pay the market price in a panic buy situation. In these cases, the calm more rational and patient trader will usually prevail.
Remember amateurs open the markets. The herd is in a stampede for shares, and if you jump in with them, you will get trampled by the professional traders who know how to react to the herd's reaction. This is why we must discount the first 30 minutes. There are exceptions when we want to take a position in the first 30 minutes but these are few and far between.
One final note on volume: On my trading screen I have the average volume column right next to the current day's volume. By keeping them both together on my screen, I can easily tell when a stock is moving on higher than average volume.
OTC BB Watch List
- MDPA
- ANTR
- TKER
- FNGC
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