Volume is something few investors follow to any degree, yet it’s probably one of the most valuable technical tools you can use to find big-winning stocks. Simply put, when volume (i.e., shares traded per day) spikes while the stock makes a humongous upmove (or downmove), especially near the start of a move, you should take note.
Look at Walter Industries (WLT), above, a leading coal stock of 2008. While most investors just heard of the coal growth story within the past few weeks, the market was telling you something big was happening way back in January. Following WLT’s sharp dip in the middle of that month (corresponding with a mini-crash in Dow), notice how the stock spiked to new peaks above 40 by the end of the month, and how volume totals were hugely above-average for ten straight days … nine of which pushed the stock higher.
When you see such mushrooming volume totals, accompanied by a sharp rise in the stock, you know big institutional investors are buying. And institutional buying doesn’t go away quickly, as you can see in the chart below. The initial volume spike seen in January (near the bottom left of this chart) kicked off what turned out to be a five-month, 180% advance in the stock.
This is the type of action I’m looking for now that the market is (finally) showing some signs of support – a few stocks to spike significantly, toward new-high ground, on extraordinary volume. That will be an early sign of leadership, and point you toward a stock that should rise significantly in the next bull market.
FYI, you can also use volume to spot tops; notice how, in early July, WLT suffered a huge price drop on the largest volume it’s seen this year. Those elephants that got in during the past few months are now exiting … and in a hurry. So WLT is unlikely to motor much higher from here.
But at this point most stocks have already topped and suffered declines — your best move is to look for the leaders of the next big upmove. And you can do that by paying close attention to outsized volume spikes.
This was a great post, thanks! I’m glad there are charts to illustrate the moves. This kind of thing really helps. I was looking for visual aides like this in the “Reading Charts” post, and I’m glad it was executed here.