Volume
Power Spikes
Relying on questionable signals from short-term trading
volume empties many wallets. The cyclical flow of routine buying and selling frequently
masks the true nature of insider accumulation and distribution. At certain times though,
volume activity rings a very loud bell. Power Spikes appear as crowd
participation escalates dramatically, either during a single day’s trading or through
a series of price bars. Both phenomena represent influential events that will extend their
influence through the underlying trend for months to come.
Measure Power Spikes through their relationship to
intermediate moving averages of volume. One day’s trading signals a PS event when
volume equals or exceeds 3 times the 50-day moving average of daily volume (VMA).
Alternatively, significant crowd activity may stretch across a series of trading days.
Although each histogram does not qualify as a true PS event, the end result is the same.
To verify these trend hotspots, daily volume must equal or exceed 2 times the 50-day VMA two
days in a row.
Prediction following identification depends on the
placement of price within the underlying trend. Depending on its location, a Power Spike
may represent top, bottom, breakout or pivot. Rather than toss a coin, combine volume
study with pattern analysis and technical indicators to determine which outcome is likely.
This process of cross-verification eliminates bias and always improves the
bottom line.
Spikes that follow an extended uptrend or downtrend
generally flag a significant reversal. These find confirmation through relative strength
indicators that have extended well into overbought or oversold territory. A PS event
accompanied by price surging through significant support or resistance provides
verification of a breakout or breakdown. Pivot spikes exhibit more subtle properties.
These events often arise in the middle of well-defined trading zones. They predict markets
that will swing (pivot) back and forth across affected prices until instability has been
absorbed.
Watch out for preplanned stock activity that negates a
Power Spike’s technical value. High volume days may not arise from an emotional
crowd. The underlying company could be issuing a secondary stock offering of many million
shares. Or a significant investment by a single holder could be scheduled to execute on
that date. And don’t forget to adjust for stock splits.
