Trader's Corner, Saturday, 04/22/2006
Should Volume Confirm?
by OI Staff
HAVING TROUBLE PRINTING?
We all know the trader's maxim that volume should confirm a move. Traders
listening to CNBC have at times heard an exuberant commentator note that an
upside breakout occurred on strong volume, with that
commentator explaining that
the volume confirmed the upward momentum. Traders have heard a worried technical
analyst comment that a decline occurred on strong volume, hinting that such an
occurrence guaranteed more declines.
Is either of those suppositions true? Maybe not. Probably not, if price closed
well off the high on a strong-volume upside breakout or well off the low on a
Annotated Daily Chart of BAX
Note that articles are sometimes prepared in advance or sometimes look back to
periods that illustrate a particular point, and so do not always reflect current
price. According to conventional wisdom, the strong volume confirmed the
bearishness of BAX's price action, but did it?
Some who look at the markets differently wouldn't think so. A different
could be that institutional investors stepped in and bought the
dip, creating that extraordinary volume spike and being responsible for the
close off the day's low. Sellers were met by willing institutional buyers, and
the buyers prevailed by the day's end. The subsequent bounce was an intermediate
one, although certainly tradable, as was the retest of the zone in December, but
that $36.50-36.75 zone was finally violated early this year.
If selling on strong
volume isn't necessarily a confirmation of the bearishness
of a stock's behavior, is a bounce on strong volume any better confirmation of
its bullishness? Again, not necessarily.
Annotated Daily Chart of BCR
This chart was prepared at the open Friday, April 21. With the evidence of the
first two gaps higher on strong volume, should
the one that occurred two days
prior be trusted? The combination of the huge volume and close well off the high
of the day on April 19 suggest that some sideways/sideways-down consolidation
may be due, although the close well of the low of the day that day may
complicate conclusions somewhat.
Another example could be found on Bellsouth's daily chart.
Annotated Daily Chart of BLS:
This BLS chart was also snapped at the open Friday, April 21. Note that the
ideal entry has passed and Bellsouth's prices now fall into possible gap
support, so this should not be deemed a suggestion to enter a bearish play now.
Of course, a bounce on strong volume and prices that hold most of the day's
gains can mean just what you've always told it means: that volume is
corroborating the bounce.
Daily Chart of BA:
Similarly, a decline on strong volume on a day when prices close near the low of
the day indicates that institutions were active that day, but perhaps they're
not quite through selling, unlike the BAX example from last fall that begins the
However, perhaps the charts contained in this
article will convince traders to
think differently about breakouts or breakdowns on strong volume. Not all such
big-volume moves should be considered confirmation of the move. Sometimes,
depending on what happens with the price action, they may be showing that
institutions are using the breakout to either distribute or accumulate stock. It
pays to be aware of when that might be happening.