This is the second of two part series. We covered the 5 Tips on Price action for breakout in an earlier post. You can refer to that post here.
1. Look at the weekly chart
Often the accumulation of a stock is easily visible in the weekly chart. You want to see large volume bars on up-weeks. Remember: A successful breakout is often a continuation in an existing uptrend.
If you see a large volume bar of e.g. 300% or more of the average 10 week volume, put the stock on your watchlist. Often that's the beginning of big uptrend. Such a volume explosion signalizes a change in the reception of institutions. They start to buy the stock and often they need weeks to months to finish their trading positions.
2. Strong volume on the breakout
Price and volume should go hand in hand. You want to see strong price moves (3-5%) and strong volume (>150% above the 50 day average volume). If they don't go hand in hand, avoid the breakout. Example: 1% price move and 300% volume or 6% price move and 75% volume are no good signs.
Strong volume is confirmation of high demand and it absorbs supply. The stronger the volume the better.
3. Volume contraction is good
During a consolidation it's preferable to see a contraction in volume. It signalizes that institutions hold their trading positions and don't sell them. Sometimes you see a sharp dry up of volume in a consolidation. That's a good sign and often a breakout starts after that.
I always look at the volume in a consolidation. I want to see a dry up if the price is moving sideways or down. That gives me confidence that market participants are holding their positions and maybe will add to them if another rally starts.
4. Increasing volume after breakout
The strongest breakouts show a rise in volume in the days and weeks after the breakout. More and more market participants buy positions and accelerate the rally. If you don't see that, it's not a problem, but you want to observe the stock more closely for a potential reversal.
If I see e.g. 3 weeks of above average volume after a breakout, it gives me confidence. After a consolidation I will add to my position.
5. Avoid exhausting volume
If you see strong volume on weak days after the breakout, be cautious. It could be a sign that institutions are selling the breakout. Example: Weak day with -3% and 175% volume!
Price and volume must always be observed. It gives you clues about the activity in a stock. Remember: big institutions, which are owning thousands or millions of shares, can only sell in high volume situations. If you see high volume and no price action, it's often a sign of exhaustion and a potential reversal.
Article source: Julian Komar
Happy learning and Successful investing.