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Volume the Most Important Indicator

Volume the Most Important Indicator
Last week I showed charts of all of our open short positions updated you on the status of the charts and explained indepth the reasons why I was still holding them.  Every chart I showed had a common theme; they all had light volume rallies when they bounced.  The light volume did not worry me and was one of the key reasons why I held my positions.  All of these positions with the exception of FFIV succumbed to selling pressure last week and as a result we went from being down 10% to locking in gains of 10% instead.  Volume is such an important indicator that it deserves a full commentary of its own so we will do that tonight.  

Follow the Money
Volume is the difference between stocks that perform with the market and stocks that out perform by a wide margin.  Trading volume in relation to stock price action indicates whether a stock is being accumulated or distributed.  Days when a stock moves strongly one way or the other within its basing pattern can help to identify which stocks are being heavily accumulated or distributed. Stocks with the heaviest accumulation are the ones that I want to focus on.  This is because I want to be with the smart money and if they are accumulating there is a very good chance that the stock will go up drastically at some point in time.  Big volume on a strong up day is an indication that one or more major institutional players are buying the stock. This is what is referred to as moving into strong hands. We should follow the money and volume is our signal. 

Accumulation or Distribution
A stock will normally form a base when being quietly accumulated or distributed.  In that base you can see if the stock is being accumulated or distributed by volume.  If the stock were being accumulated you would see higher volume on up days and lower volume on down days. Vice versa for distribution action smart money quietly unloading shares.  If you check the stock once a week or once a month you may think that the stock is going nowhere because it has not moved in price however it is forming a base and that is healthy as it gets the impatient speculators out of the stock on down days and strong hands into it on up days. Then one day the stock breaks out of the base on above average volume and it is on its way.  It takes time for the institutions to accumulate because if they bought it all at once the price would sky rocket and they do not want to pay up for the stock.  Instead they steal the shares by testing the patience of the main street investor. 

Distribution a Clue to Short
These positive volume clues should lead you to the stocks that the smart money is accumulating.  These same clues can also steer you clear of the stocks that they are unloading.  We do not want to be long with any stocks that are under distribution.  These stocks are about to fall of a cliff and we want no part of owning them.  However we can use this volume distribution signal to take a short position in the stock.  If the big boys do not want to own it then I can conclude that the stock must eventually go down.  I check for the volume on down days and it will be heavier than the volume on up days.  Many of our current short positions were taken because of this distribution factor.  A lot of these stocks were market leaders just a few months ago reaching 52 week highs.  At the beginning of a leading stock's correction it is normal for volume to increase as the stock sells off but the real clues come in during the recovery stages.  As the stock begins to recover from the initial sell off check the volume. If it is light then we have the makings of a short position in a stock that will most likely head south over time.  By checking the volume you will know the difference between distribution and a good old fashion shakeout.  

Price Without Volume is Like Pizza Without Cheese
You would not order a pizza without cheese would you Well some people do but in the pizza world these people are known as dumboberry's they just do not know how to eat pizza.  Just like some people in the stock market world do not know how to trade stocks.  Volume is a very important clue and if you are trading without it you are making a grave mistake.  Our short positions were entered using volume as one of our indicators.  Look at the volume on down days compared to the volume on up days and you can clearly see when they are under distribution.  This puts us on the same side of the trade as the smart money and I like our chances when we follow them.  Price without strong volume will lead you into a fake out or bull/bear trap.  Confirm the move with volume and you will be on the right side of the trade most of the time.

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