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How To Deal With Low Volume Breakouts

As the market has gone into its convoluted spins and twists, we often get
complacent and forget the fundamentals of market moves. One of the most
important is volume folks and we apologize for not bringing this up in
months. When you are looking at a stock for a breakout over resistance, it is
often very important to the validity of that breakout if it comes with
accompanying volume. Too often a breakout that occurs on low volume is
quickly repelled. Why is that? Let's look. Suppose the XYZ stock has run up
to 35 bucks and faded off. 35 becomes the upper resistance. Let's also
suppose that XYZ has an average daily trading volume of 200,000 shares. Well
we have already learned something very important. We have learned that on
a normal volume day, XYZ has the gas to get to 35, but maybe not any
higher.

Now suppose XYZ gets back to 35 several days later on 200,000 shares traded.
But once again XYZ is repelled at 35 and it sinks back to say 33. What do
you think is going to happen the next time XYZ gets close to 35 again? The
short sellers are going to bombard it with shorts, hoping to drive it back
down and make some dollars. Why not right? It has already proved that 35
seems to be a ceiling.

Now, suppose XYZ gets back to 35 and then actually gets up and finally
over 35! Now it's at 35.50, but it did so on only 200K shares. Great right?
No. This is a signal to be very careful. Why? Because it is telling
us that it has made it across a resistance level on a "normal" amount of
volume. Somebody is missing from the equation. The short sellers didn't
hammer it. But guess what? Those short sellers know it made it, and they
know it made it on easy volume. Do you think they might make a move and
try and pound it down again? Oh yeah, they just might.

This is why we often see low volume breakouts only last one day above the
resistance level. The next day the shorts come in and without the
appropriate rise in buyers volume, the stock gets hammered back down. For
any breakout to be "real" enough to have some faith in, you want to see
that higher volume battle between the longs and the shorts right at the
resistance, and the buyers win. When there is a high volume battle at the
resistance level it becomes a matter of willpower and staying power. If
the shorts are tossing all heck at the stock and the buyers are eating it
up and "then" it moves up above resistance, the shorts will finally be
forced into covering and "up she goes".

Over the past few weeks volumes have been anemic at times. Stocks that
often trade 350K shares a day have traded 180K and that makes it tough to
believe in a move higher for sure. But when the volume does arrive, watch
the resistance lines folks. If the stock is busting above resistance on
big volumes the shorts have to give in and cover or live with a bigger
chance of loss. Sometimes we take for granted that everyone is aware of
such things and that they are paying attention to them. Often we have to
get a friendly "wake up" reminder to tell the newer readers.


About the Author: Larry Potter is a recognized authority on the subject of trading. For a FREE report on HOW TO TRADE FAST from Stocks2Watch®, go here: Trade Fast




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