How To Spot Significant Volume Intraday
The breakout player who trades for the
intermediate term requires the target stock to clear his or her pivot point as
trading volume surges well above average daily volume for the stock.
It’s the volume part of the
proposition that throws off some beginning traders. We all know how to recognize
exceptional daily volume at the end of the day. But what about in the middle of
the trading session, or earlier?
Here’s a picture-perfect example of a
breakout with supporting volume. Affymetrix broke out of 14-week cup-with-handle
base on Dec. 20, 1999 (see Point A in
chart). By the end of the session, more than 1.6 million shares had changed
hands, more than twice the stock’s usual trade.
Most stocks don’t wait until the final
minutes of the day’s session to break out. Many charge out of the gate in the
first hour of the day’s trade. You obviously cannot wait until nearly the end of
the session to get the day’s volume. By then, your target stock may have
extended more than 5% beyond your pivot, putting it beyond a safe buy zone. So
how do you know whether volume is truly above average?
There are a couple solutions to this
problem. But first, let me disabuse you of the notion that there is a magic calculation
that will guarantee that you correctly gauge volume every time. Trading often
boils down to feel, to judgment developed from trading experience and watching
the market over time, to making educated guesses.
My approach is pretty simple. Once a
week, I scan the market for stocks meeting my criteria for break out candidates.
Assuming that I consider the market conducive to intermediate-term momentum
trades, I load my target stocks into my alert software and set the program to
notify me when any of my watch-list stocks hits its pivot point.
In the meantime, I watch how these
stocks trade in real time, particularly in the first and last hour of trade,
typically the most active intervals of the session. What are the order sizes?
How frequently do the trades come in? I don’t take notes. I don’t perform
calculations. I just pay attention to each stock’s behavior and learn its tempo.
If a stock clears my pivot point, I
immediately watch the order flow in real-time. You can do this with Level I
quotes. If the trade looks fast and/or the orders pick in size relative to the
stock’s norm, that’s all I need to know. I’ll buy.
Once I’m in, I’ll stay in. Ideally, by
the end of the day, the volume for the breakout session should tally up to 150%
or more of the stock’s average daily volume for the past 50 sessions. (On very
large-cap stocks, you might relax that requirement to 140%.) However, if volume
falls short of that parameter, I remain invested. I stay in unless the stock
hits my stop-loss price.
If this approach sounds too
seat-of-the-pants, you can deduce or extrapolate a theoretical daily volume
figure from the partial volume observed at the time of the breakout. Here’s my
variation on a technique used by Kevin Marder.
Multiply the breakout stock’s 50-day
average volume by 1.5 to get your end-of-day volume bogey. (For very large-cap
stocks, you can use 1.4 as the multiplier.) Then multiply that figure by time
fraction of the trading session that has occurred at the time of the breakout.
The result is your intraday volume bogey. Actual intraday volume must match or
exceed the bogey. Otherwise, no dice.
We have to make one more adjustment.
Volume during the first half hour of trading is usually heavier. So we insist adjust the
mid point of the session to 12:15 p.m. ET, rather than the actual mid point of
12:45 p.m. By that point, we presume half the day’s volume has traded.
For example, let’s say XYZ stock
traded 500,000 on average over the past 50 sessions. Multiply 500,000 by 1.5 to
get your end-of-day volume bogey: 750,000 shares.
Now let’s say XYZ breaks out of a
cup-with-handle at 12:15 p.m. ET. By 12:15 p.m., I presume half
of the volume has traded. So I multiply 750,000 by 0.5
(i.e., divide by 2), which gives me an intraday bogey of 375,000. At that point
in time, if XYZ’s volume meets or exceeds 375,000 shares, I buy. If activity
falls short of 375,000, I pass.
Here are the other fractions:
at 10:30 a.m. ET, I multiply 50-day
average volume by 0.25
at 11:15 a.m., I multiply by
0.33.
at 1:15 p.m., I multiply by 0.6.
at 2:15 p.m., I multiply by 0.7.
at 3:15 p.m., I multiply by 0.9.
Using Level
II Before The Open
Why do we care about volume in the
first place? Heavy volume on a breakout confirms that there’s an imbalance, with
demand overwhelming supply, aka buyers overwhelming sellers, aka bids
overwhelming offers.
Sometimes, imbalances build up ahead
of the opening bell, sending stocks flying out in the first minutes
of trading. In such cases, you may not get even an hour’s worth of trading to
extrapolate from before the stock extends past your window of opportunity.
If you have Level II quotes, you can
spot these imbalances before the open by looking for gross over weightings on
the bid side in your target stocks. Kevin Marder mentioned this pre-open check
in his Sept.
22, 2000 commentary.
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