The Volume Theory: Determining Which Stocks May Continue To Trade Higher

by: Teresa Dawn

Volume is almost always used as a primary or secondary indicator to confirm either an uptrend or a downtrend. In many cases, volume is higher when a stock trades with the trend and then it is lower when a stock trades against the trend. For example, if a stock, such as Netflix (NASDAQ:NFLX), which is in an uptrend, trades higher then volume should be higher, but on down days, the volume should be lower; that is, until the trend is reversed. Of course there are many variations to this rule, as volume theories rarely work on a consistent basis. Yet perhaps this rule could be used as part of your research to determine if a stock can continue to trade higher.

In this article, I am testing the Volume Theory, to determine if significant increases in volume indicate whether or not a stock will continue to trade higher. I am looking at certain stocks, those that are trading at 52 week highs and saw volume increase by more than double the average per session during a three month period. If the volume theory is correct, then each of these stocks should continue to trend higher until we see a rapid shift in the volume to the downside. This does not mean that the stock will not have down days, but rather, that volume will be lower when it trades lower. Unfortunately, since new highs were just created, we will not be able to properly test the theory. However, here are a few stocks that meet the criteria, you can then watch and determine whether or not the uptrend is confirmed by a sudden boost in volume.

  • Primerica, Inc. (NYSE:PRI) trades on average 324,000 shares per day, but saw an increase of 803% on Friday with 2.72 million shares traded, as it traded higher by 3.32%. The financial stock is now trading at all-time highs. It traded higher for two reasons, earnings and news that it would be moving to the S&P MidCap 400. The company trades with a market cap of $1.90 billion and has increased in valuation by 36% during the last year, including 12% in 2013.
  • Linkedin Corporation's (LNKD) volume increased 678% after it reported earnings on Friday. The stock saw a 21.27% move higher, and the increase in volume could be an indication that it could continue to go even higher. The jobs based online social media company has a market cap of $16.17 billion and is now trading at all-time highs.
  • Fleetcor Technologies (NYSE:FLT) traded higher by 10.85% with a volume increase of 392% compared to its average per session. The stock responded well to earnings after beating expectations. Fleetcor Technologies is trading at new all-time highs with a market cap of $5.35 billion and a one-year gain of 81%.
  • Sirona Dental Systems, Inc. (NASDAQ:SIRO) traded higher by 4.99% after reporting better than expected earnings results. The healthcare stock saw its volume increase 191% and now has a market capitalization of $4.01 billion.
  • Carlisle Companies, Inc. (NYSE:CSL) reached all-time highs after reporting earnings that were better than the consensus. The stock traded higher by 3.95% on volume that was 165% higher than its three month average.
  • NCR Corporation (NYSE:NCR) reached new highs after announcing that it expects FY2013 revenue to rise in the 10% range. The stock saw its volume increase 152% as it traded higher by 4.36%. The stock has now traded higher by 38% during the last year, although half of those gains have occurred in 2013.

I am not suggesting that any of these stocks will continue to trade higher. However, there are a lot of investors who swear by the connection of volume to price. Therefore, it is worth our acknowledgement, and the fact that all of these stocks were driven by the force of earnings, and fundamental gains, means that we should perhaps pay attention to what many believe is an indication of a larger uptrend.

Disclosure: I am long FLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: All increases in volume were obtained from