Why Watch Volume? November 10, 2006

Deron Wagner has the answer for you:

Although stocks rose in higher volume in each of the two preceding sessions, significantly more shares traded hands yesterday than in either of the “accumulation days.” The 2.45 billion shares traded in the Nasdaq was the highest since September 15. Obviously, it was negative that such a spike in volume occurred on a down day. Yesterday was the fourth “distribution day” in the Nasdaq within the past month, while it was the third such day of institutional selling in the NYSE. Healthy markets can typically digest two to three days of higher volume selling within such a period, but it is definitely a warning sign to the bulls when the rolling count of “distribution days” exceeds four days within a four week period. Remember that volume is always the footprint of institutional activity that shows what is really happening “under the hood” of the market. Since institutional trading activity accounts for more than half of the market’s turnover on any given day, the stock market always follows the lead of mutual funds, hedge funds, pension funds, and other institutions. That’s why we pay so much attention to the daily relationship between the market’s price and volume.

So where does the market go from here? Good question. So sometimes, during times like this, you look to areas that can trade somewhat independently of the rest of the market, like the commodities:

The market has been giving a lot of mixed signals that make it difficult to predict whether the S&P and Nasdaq break out to new highs or move down to their prior lows. Many sectors and leading stocks have had both false breakouts and breakdowns, and the market has been showing a mix of accumulation and distribution as well. The outcome, however, doesn’t matter to us either way because our goal is not to predict which way the market will go. Rather, our job is to be thoroughly prepared to react and profit from moves in either direction. We’re satisfied with our current mix of open ETF positions, as oil, and especially gold, both trade largely independently of the stock market.

Wiggle Room November 1, 2006

Deron Wagner has some good advice when it comes to placing stops. Keep in mind that he’s a relatively short-term trader, so adjust the idea for your own situation, but the idea is the same – make sure you give your stocks enough ‘wiggle room’ when choosing your stop points:

Throughout my early years of being a novice trader, one of the biggest problems I had was being stopped out of a stock, only to watch it reverse back in the right direction only pennies below my stop. Eventually, I figured out why this was happening. The problem was that I was placing my stops at the same level as all the other traders. My stop was too obvious! Because specialists and market makers knew where the majority of stops were residing, they were making sure that every test of trendline support resulted in a quick probe below those stops. Then, they could accumulate shares of the stock before continuing the primary trend. After years of frustration from losing money in this manner, I learned to give my stops enough “wiggle room” below the obvious trendline support where all the other traders had placed their stops. Years later, I now know my stops are in the right place when the position I am in reverses just before hitting my stop.

On the recent market action, Wagner sees a bit of ‘churning’ going on. I can’t disagree:

Given that the S&P, Nasdaq, and Dow were each within 0.1% of unchanged, yesterday’s higher volume pointed to a bit of “churning” beneath the surface. “Churning” occurs when overall volume increases substantially, but prices don’t. If this occurs near the lower channel of a downtrend, it is often bullish because it indicates institutions are scooping up shares while the bears are trying to drive stocks lower. Conversely, “churning” near the upper channel of an uptrend is usually a bearish sign of institutional selling into strength. This, of course, doesn’t necessarily mean that stocks will suddenly fall from here, but astute traders should proceed on the long side with caution in the short-term.