I am new to technical analysis trading and had a couple of questions. I like your newsletter a lot, but am unsure when to enter a trade. Can you explain the difference between rising, sound, and heavy volume? Also, what do you mean by a continued bounce? These terms are a little confusing and leave me wondering exactly when I should jump on a trade. (October 12, 2000)
Good question. Terminology varies depending upon who you listen to. The primary indicators, however, do not. Volume versus price action is the king. We look at volume based on the last 50 days of trading; that gives us an accurate picture of what the institutions are doing with an issue. Heavy volume is volume that is above that 50 day moving average. To put it into perspective, we want to see volume of at least 1.50 times the 50 day average on breakouts from cup with handle patterns and double bottoms. That is heavy volume. Rising volume refers to volume that is up over the previous session whether above or below average; we talk about this as a reference point to describe what is happening with the stock on that day. When we look at an entry point the next session and refer to rising volume, we want to see volume rise on the price move we are looking for. Why? That confirms the move we are seeing.
We are often asked about rising volume intraday. How do you know volume will be higher by the end of the day based on what happens in the first hour? You don't know, at least not in absolute terms. What we do know is that trading on any stock is normally the highest in the first and last hours. If the volume in the first hour is well on its way to meeting or topping our volume target, that is what we are looking for to take a position. What is meant by 'meeting or topping our volume target' is that if we double that volume in the first hour and it is roughly 50% of our target, that is easily enough volume.
By 'continued bounce' we refer to a stock that has already bounced off of a support level, e.g., a trendline, moving average, or price consolidation support level. We don't mind getting in on a stock that has already started a bounce up off of support if it is on strong volume and there is more upside to the market overall. Remember, you cannot and should not try to capture 100% of every move. If you are trying to do that, that means you are anticipating moves in stocks and buying into them before they show the moves that we are looking for. Wait until the move is made, then get it. You won't get 100% of the move, but if you can catch 50% to 60% of a move, beautiful. What we really like is that we are seeing the move start with good fundamentals, and that gives us an edge and a bit more safety than guessing that a move is going to come. How many times do we see a great pattern that looks so ripe to break out, but then just dies on the vine or is overwhelmed by a market move? We avoid getting carried away with a pattern; there are a lot of good looking used cars out there, but we want to see them start to run before we put our money into them.
Charting question from last night: Big Charts now has real time charts available on the web. They are no longer delayed.
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