Voting With Volume
How can you tell when positive news is
really bullish? Price and volume. If a stock advances on strong volume in the
wake of news, the smart money is buying it. If the price action is there, but
volume lags, I stay on the sidelines.
It’s not that the institutions are
always right. But right or wrong, their sponsorship is key to sustaining the big
advances.Â
JDS Uniphase
(
JDSU |
Quote |
Chart |
News |
PowerRating) got the
institutional nod. After Wednesday’s close, Standard & Poor’s said it
will replace Rite Aid
(
RAD |
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Chart |
News |
PowerRating) in the S&P 500 Index with the
fiber-optic giant. The change goes into effect after the market closes on July 26. Shares in the fiber-optics
giant surged 21 3/8 to 128 1/8 on four times its usual trade. That’s not your
Aunt Nellie running out and buying 100 shares of stock. That action reflects big
demand by mutual funds, hedge funds and other deep-pockets players.
Â
The stock, which closed bullishly near
the high of the session, has formed the better half of the right side of a
correction-recovery pattern. A pivot point for the momentum trade is the stock’s
resistance level at 131 3/16 (see black arrow on chart).
Ideally, the stock would consolidate below the resistance level on contracting
volume and volatility before surpassing the pivot on another expansion in
trading activity.
Inktomi
(
INKT |
Quote |
Chart |
News |
PowerRating) posted four cents
per share in its June 30 fiscal quarter vs. an eight-cent loss a year ago and
sailing past analyst estimates averaging two cents.
The company has labored
under a cloud since Yahoo announced it was replacing Inktomi
as its search-engine software provider with Googol (see
black arrows). We’ll let the market tell us whether the clouds are
lifting. So far, momentum traders should remain on the sidelines. The stock
gained 6 3/8 to 129 7/16, but the move came on sub-par volume. The institutions
aren’t buying in yet.Â
Inktomi
shares have begun the task of constructing the right side of a possible cup
pattern, but it has a long way to go. As an intermediate-term momentum trader, I
avoid stocks that have undergone recent corrections and have not yet made up at
least half the point loss of the recent decline. At present, Inktomi is still
trading below that mid level, which is arrived at by adding the pre-correction
intraday high with the correction low, then dividing by the sum by 2. Inktomi’s
mid level is 165 11/16.
All stocks, of course, are speculative. On any trade, be sure to protect yourself by setting a protective price stop where you will sell your long position or cover your short position in the event a trade turns against you. Also don’t over-expose yourself by risking too much of your capital on any single trade.
Limit the size your position in relation to the total equity in your account.