Volume Wheels Fall Off Price Truck
Volume does more than confirm. It’s
the engine that drives price. Demand volume overwhelming selling supply forces
price higher. Supply outstripping demand sends price lower. And mediocre volume
spells lackluster price performance.
That applies even to the greatest
performing stocks of the 1990s bull markets. Take Cisco Systems
(
CSCO |
Quote |
Chart |
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PowerRating). On
Friday, the No. 1 maker of networking equipment said it would acquire Netiverse,
a privately held developer of technology for speeding the delivery of Web
content, for $210 million in stock. Cisco said it currently holds a 20% of
Netiverse.
Cisco shares underwent a sort of
double-bottom correction but stalled out (see Point B
in the chart) before the share price could even reach the intermediate peak of
71 7/8 formed on May 1 (see Point A).
The stock’s loss of power shows up in
the underlying trading volume. Notice how trading volume swelled above the
stock’s average daily trade on the first and second lows (see Points
C and D), then fell to sub-par
levels as the stock tried to recover. This coincided with a failed rally (Point
B), followed by an extended, downward trading zone.
In another unhealthy sign, the stock
has been stuck below its mid level of 66. The reason I avoid stocks that trade
below their mid levels has to do with overhead supply. Overhead supply is the amount of shares in
the hands of shareholders with paper losses. These weak
holders tend sell into rallies, blunting
further share-price progress. You can find a stock’s mid level by
summing the pre-correction high and the post-correction low, then dividing the
result by 2.
Cisco can come alive from here, but
I’d avoid using the pivot points of a double-bottom base as buying triggers. A
proper double-bottom base would take out the intermediate-term peak rather than
stalling below it. For more on the double-bottom or W pattern, check out my new
lesson on double-bottoms, appearing Saturday.