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.