Identifying Strong or Faulty Stocks using Stock Volume Indicators

When researching stocks to invest in, identifying key stock volume indicators is an important step. Always start with concrete fundamental analysis to choose companies that are performing well or undervalued. Once you’ve completed your due diligence and are confident in your pick, it’s time to see if now is the right time to buy.

Entry Points

Picking an entry point is the next step in the process of buying a stock. We discuss some of the most common chart patterns in our learning center. You can find out more about how to spot a cup and handle, a double bottom base, flat base, and more. Follow the links to make the most of picking an entry point.

Faulty Volume

Most of the chart patterns previously discussed, talk about volume being a key factor. It is important to assess volume on the day of the stock breakout, this is true. However, what you may have not considered before is looking for patterns of high volume over time and what that might mean for your precious investments.

Before entering into a long position, analyze the volume of the past weeks and months of volume. If you see many negative days in red, with higher than average volume, it could spell trouble. Pick for example, the all of the days or the weeks in your cup and handle, or whichever pattern you are trying to enter. Count the amount of negative (red) days vs positive (green) days that occur with volume above that line.

Below is a chart of BlackBerry through its spike during the short squeeze noise with Gamestop. This could be seen as a saucer pattern Between 12/23/2020 and 1/11/2021 before breaking out. Pay close attention to the very high volume days. In this chart, we see the 3 highest days before the saucer as red days. After the stock increases in January, we also see all 3 of the largest gain days be red in volume. This was due to the fact that the stock opened at such a high price each day, but was met with heavy selling during trading hours and ended lower that day than it opened (even though the price was an overall increase from the prior day’s close).

What Can We Learn From This Chart?

Let’s see if we could have predicted the sharp decline in price on 1/28/2021. Look at the top 10 trading volume days since the beginning of December to just before1/28/2021. Eight of the ten days are all red volume, which means more sellers pressure the stock into closing at a lower price that day than it opened at.

This trading action shows heavy resistance to the stock and should alarm anyone holding BB stock to sell sometime on the way up to the $36 high when volume for the three days Jan 25-27 climbed even higher and ended red each day.

Over the weekend, we will add to this post for identifying strong volume movements.

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