What happened to all of the buying volume last Thursday? Were not the institutions buying? (August 9, 2000)

  Institutions were buying last Thursday as the Nasdaq plunged to a recent low. While many proclaimed this as a definitive change in the index, we were not convinced. The high volume was appealing, but many stocks still had poor patterns. The day launched a low volume rally back to resistance, but it did not change the market.

What often happens when markets are falling after a good move up or after a consolidation, there is the desire to see stocks hold at support levels such as the 50 day moving average, the 200 day moving average, or some other support level that the market gurus feel is important. What we often see on the first few attempts at pulling back are institutions stepping in and buying those stocks that are important to their portfolios. They want the stock to hold at a particular level to maintain value in the fund and prevent a real meltdown. This can give the look of a reversal or other end to selling.

Almost as quickly as last Thursday's buying entered the picture, however, it dissipated. The institutions had done their job as the indexes continued to march up as the retail investors jumped in on the name brand stocks. Volume has peeled back until the past two sessions, with Tuesday's session actually showing some distribution in the Nasdaq. Now the Nasdaq is at resistance, and it is struggling. If it falls back toward the 3500 level, we will probably see some institutional buying once again. Indeed, after this type of action and when the market starts to pull back down, we often see the retail buyers come in each morning and try to rally the market back up. That usually fails and gives way to another round of selling. Watching volume tells us if the institutions are stepping in to support stocks or whether they are selling into the morning rallies.

How do you know if a high volume day such as last Thursday is the real thing? It is hard to tell on that particular day. We look for the volume, which is what we got, but we also know what leading stocks are doing. Are they in historically good patterns that lead to market rallies? This past rally started when stocks had fallen out of their patterns. They spent the last four days trying to get back up to those levels, but many are pulling back once again. If we see big volume, block trades, leading stocks and sectors breaking out of good patterns, that is a pretty strong sign. Then comes confirmation 4-7 days later, with a rise of 1%, preferably more, on stronger, above average volume. That helps set up a further move up as it indicates institutions are buying (literally) into the rally.

Last Thursday saw many big names moving up on strong trade. Still, many had patterns that, while once promising, had been trashed in the late July selling. They were just trying to recover some ground, and still had a lot of work ahead of them to truly break out. When the volume dried up as the market continued to rise, our skepticism grew. We made plays to the upside because we can make short term trades on these moves, but we were ready for it to fail and we were not pinning our ears back and dumping money into the market.


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