Volume Clues To Separate The Winners From The Losers

Trading volume in relation to a
stock’s price action and how that relationship interacts within a stock’s
basing pattern indicates whether a stock is being accumulated or distributed.
But it’s the “volume clues,” those days when a stock moves strongly
one way or the other within its basing pattern, that can identify which stocks
are being heavily accumulated or distributed. Stocks with the heaviest
accumulation are the ones in which we want to focus our attention.

Hunting for a volume clue is one way
I go about narrowing down my list of prospective buy candidates in a healthy
market environment. Big volume on a strong up day is a strong indication that
one or more major institutional players are in action. If big, institutional
investors, who have a better idea about a company’s prospects than you or I,
are accumulating shares within a stock’s basing pattern, that may just be
their starting point.

For example, if some large Fidelity
fund has already done its homework and has decided to buy 500,000 shares or
more over time, the fund is likely to push the stock higher each time. It may
build some of its position in the stock’s base, then buy more as it breaks out
to new highs and finish off its position into the stock’s fresh, new up trend.
Now imagine several large fund managers doing this simultaneously in a hot,
new stock in a hot, new industry. This is what’s referred to as “moving
into strong hands”.

Following the downtrodden portion of
its corrective phase from April 22, 1999 through August 11, 1999, Verticalnet
began to show several awesome volume clues, with the biggest clue coming a
week before its 27-week, cup-with-handle pattern was complete.

 

The first volume clue occurred on
Aug. 13, as it bounced off its correction low. The clue: it was the heaviest
volume day within the stock’s entire basing period at that point. Another clue
arose two trading days later on Aug. 17 – the second heaviest volume day since
the April peak. Verticalnet corrected this initial surge over the next month
on considerably lighter volume and held above its correction low to boot.
Then, another large increase on volume ensued on Sept. 10, with the stock
closing higher, followed by yet another pullback on lighter volume. See the
ebb-and-flow developing between volume and price? But the stock has yet to
work through its overhead supply within the basing pattern before we even
think of buying it. In fact, at this point, the market was acting questionably
with no clear signs that a fresh, new up trend was developing in the market –
our first line of analysis.

Then it happened. Verticalnet broke
above its seven-week congestion zone, the zone containing the initial volume
clues, and headed sharply higher for its old highs. But what about volume at
this point? Was it tailing off or getting stronger? Not only did it get
stronger, volume surged higher than the day before in five of the seven up
days between Sep. 29 and Oct. 8, culminating on the final day of the move – a
cluster of clues.

It gets better, though.

The stock pulled back over the next
six trading sessions on lighter volume again, then surged one more time to
complete the cup portion of its basing pattern on Oct. 22. This final surge
occurred on the heaviest volume day of the entire basing structure – now
there’s a volume clue!

But the pattern is not yet complete.
It pulled back one more time into a nice, tight handle. As I watched, I
thought, “c’mon volume, be light on this pull back.” There’s nothing
like watching a beautiful price-and-volume pattern set up over several months
only to watch the stock eventually fall apart. Lo and behold, another move
back to the Oct. 22 high and up-and-out-of-there on Nov. 3 – BREAKOUT!
I bought Verticalnet breaking above its Oct. 22 close of 62 1/2. The rest is
history. Verticalnet was one of the biggest winning stocks during the Nasdaq
Composite’s fourth-quarter run, advancing 363% from its breakout spot in 12
weeks.

Not every big winning stock will
necessarily demonstrate as pronounced a set of volume clues as the above
examples. Some will only show a volume clue on one day. Nonetheless, you want
to see that one-day volume clue near the top of the base.

And just as a positive volume clue
can lead you into a great stock, negative volume clues should lead you away
from stocks that may be about to fall out of bed.

Price without strong volume breeds
mediocre, nothing-to-write-home-about, positions. The whole idea is to stuff
as many potentially big-winning stocks into your portfolio as possible as the
market begins a fresh advance. Searching for a volume clue is an excellent way
of narrowing down your list of buy candidates.