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My Favorite Charting Method

|Includes:Axion Power International, Inc. (AXPW)

For the last 20 years or so I've used volume weighted values to track both price and volume in stocks that are important for me. This instablog is an introduction to my methodology and what I look for. Since they're the easiest to access, I'll use the numbers for Axion Power (NASDAQ:AXPW).

Since I believe supply and demand are as important as business developments when trying to predict market behavior, the first chart I watch is changes in daily average volume over time. To keep things simple, the following example shows how the 10-day and 200-day moving average trading volumes compare over the last three years. It's also a classic example of the way micro-cap volatility tends to cycle around the 200-day average over time.

The important takeaway from the graph for today is that the 10-day volume is about ready to penetrate up through the 200-day volume which usually foretells a sustained ramp in trading volume.

The second set of values I track are volume weighted moving average prices for periods of 10-, 20, 50- and 200-days. I've found that volume weighting eliminates the day to day volatility and offers a better view of how a stock is behaving. In the following chart, I've also included the 200-day moving average volume on a secondary axis.

The two points that I've marked with arrows were the announcement of the Exide partnership in April 2009 and the announcement of the DOE grant in August 2009. The spike where the volume line passes up through the price lines was about the time the BMW announcement was unveiled. In each case the 10-day started on the bottom and ultimately penetrated up through the 20-, 50- and 200-day lines.

While it's hard to see without magnification, the 10-day VWMA has just penetrated up through the 20- and 50-day lines and the 50-day average has increased by a fraction of a cent. Since all the moving averages retested their lows over the last month and the curve shape is very similar to what we saw with the 2009 announcements, I think there's a fair chance the price could spike up sharply from here, rather than trend up slowly.

Volume is one of the strongest forces in the stock market, and Axion's volume numbers are very hard for me to ignore.

Stocks: AXPW