Four Stock Trading Volume Indicators
No discussion of technical analysis would be complete without a discussion of
volume. By paying attention to trading volume, you can pick up clues about where a stock is headed. Here are four general rules to keep in mind when you’re buying or selling a stock:
1. When prices are rising and volume is increasing, the uptrend will likely continue.
2. When prices are rising and volume is decreasing, the uptrend will likely falter.
3. When prices are falling and volume is increasing, the downtrend will likely continue.
4. When prices are falling and volume is decreasing, the downtrend will likely falter.
"Churning" occurs when a stock’s price is relatively stable but volume is heavy. This situation must be watched carefully. One of two things is probably happening. The camp that was previously in control (bulls or bears) may be running out of ammunition. In this case, the churning is an early warning that a trend reversal is imminent. It’s also possible that the churning is nothing more than consolidation after a significant move in a stock. Only time will tell if a continuation of the trend is in the offing.
When there is huge volume of three or four times the daily average, the stock will likely do one of two things. First, if the big volume day occurs after a significant move in the stock, it may mark a change in trend. Let’s say the stock was falling on increasing volume. After several days of downward pressure, the bottom drops out of the stock and the trading volume skyrockets. This is known as a climactic selloff, and it usually marks the bottom in a decline.
Conversely, if a stock has been trending higher and trading volume spikes up as investors flood into the stock, that huge volume day may mark a top. The buying frenzy that occurs at the end of an advance may even create an exhaustion gap. But whether it does or not, a reversal is likely.
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