Unusual Volume

UNUSUAL VOLUME

We have noted that a "congestion range” on the chart shows that a lot of shares have changed hands at a given price for a relatively extended time, and makes this price a probable support or resistance level. Logically, it should not matter too much, however, whether the trading took weeks, or occurred more or less in a relatively short time, as long as trading activity is heavy. A brief flareup of volume during a price movement, even though it does not appear on the chart to have interrupted the price trend, often discloses a potent support or resistance area which later proves effective in checking a decline or a rally.

For example, a stock may be rising on average volume and hit, say, $14 a share, whereupon trading suddenly expands sharply. Without any extraordinary acceleration, the price continues to rise, but at about 16, the volume subsides to "normal,” or the rate prevailing before the flareup. The price may now continue upward, fall back or move "sideways,” but in any case, the chartist will mark this 14-to-16 area as a High Volume Zone, and will look for support or resistance in this area. The principle works just as well on a decline, of course. (For examples of High Volume Zones, see the charts at the end of this chapter.)

When the volume of trading expands sharply as a stock reaches an unexpected support or resistance level, the potency of that level tends to be increased. Paradoxically, a sharp drop in volume sometimes appears to have the same significance! Why this should happen is problematical; perhaps many of those interested in a stock withdraw from the market at what they regard as a significant turning point to see which way it will jump. The drop in volume therefore would be a tip-off to a shift in market psychology associated with a specific price level. In any case, while volume goes up more often than down at support and resistance levels, it goes down often enough to warrant the consideration of the analyst.

Another note on volume: when a stock breaks out of a congestion zone in which it has been trading, the analyst will, as always, watch the volume to help determine whether the breakout is "valid,” rather than just a flash in the pan. It is helpful to know that a valid breakout on the rise (penetrating a resistance level) usually is accompanied by an increase in volume. On the other hand, a valid "downside” breakout (penetrating a support level), usually occurs on light volume at first, which must be confirmed by an increase in volume as the price continues to decline.