Many traders and investors follow volume for all of the wrong reasons. Often, you will see high volume moves in stocks occur after an earnings report or a major news events. How many times have you heard someone say, that stock just broke out on heavy volume? The chances are you have heard some trader or investor say that, probably multiple times. But how will that help you in the future?
One of the key secrets to using volume is to see how a stock pulls back into a high volume bar or candle on a chart. For example, recently I bought Verizon Communications Inc. (NYSE:VZ) on a pullback at $45.80 a share. Many traders were asking me why I bought that particular equity since price was trading below the important 50, and 200-day moving averages. The stock also broke down and closed below its last support pivot on the charts at $47.77, which was made on June 3, 2013. VZ was also in a confirmed downtrend.
According to most traders and investors the stock had very little upside, if it could even bounce at all.
As many traders know, Verizon Communications Inc.(VZ) sold $49 billion of bonds on September 11, 2013. This was a new record for the biggest corporate-debt sale ever. Many traders and investors were scared to step in to VZ stock based on all of that type of news. After all, look at all the new debt the company is now taking on. This is where the volume and the chart pattern will help you overcome fear. You see, on September 10th, the price decline in VZ stock was coming into the wide range candle bar from September 4, 2013. On that day the volume on VZ stock was 26.5 million shares. The prior day which was September 3, 2013 the stock traded 47.0 million shares, this was also the pivot low in VZ stock. The trading volume on September 10th, when I bought VZ was just 19.0 million shares, so this told me that there would be a better than average chance of the institutional money defending VZ stock down at these levels, at least for a short term bounce. Today, VZ stock is trading at $48.35 a share. This is not a bad bounce from the $45.80 entry level in just four trading days.
Traders can often watch the volume on charts to see where the big money is positioning themselves. Remember, high volume moves do not indicate that the average investor at home is accumulating stock. High volume moves indicate heavy institutional money supporting an equity, when the average person or investor is fearful. In other words, high volume moves represent real institutional sponsorship in a stock. Traders and investors must learn this and watch volume a little bit differently now on.