• Trading Information - Buying Into a Pullback
• The Equilateral Triangle
• Trading Chart Patterns
• Share Purchase Plans
• Yellow Cake…Anyone?
• Read the tape – it can tell an interesting story

You need not look further than Telstra and its recent price action. On the 21/8/09 the Futures Fund sold more than 600 million shares in the Telco in an off market trade with institutions at $3.47. The trade showed up in market volume the following day and stuck out like Alf Stewart on a Mardi Gras float. A big red bar on anyone’s chart should ring some alarm bells. It was not until yesterday when reports surfaced that the Government had made Telstra an offer it just can’t refuse. The offer will see Telstra either voluntarily separate its retail and wholesale arms, or face government intervention in the form of forced functional separation and a ban from acquiring additional wireless spectrum necessary to evolve its NextG mobile network. ‘Google’ Telstra news and you’ll get the full story however ‘the tape’ gave an insight into the issues at the telco before any news had leaked (at least not the public). 

An argument could be made that the market is at the start of a new major bull run. I don’t know one way or the other, but we are seeing a greater number of stocks breaking to new highs. On a scan yesterday afternoon, 70 stocks came up as closing to new 100 day highs. This number will grow as the market continues to strengthen. Trading ‘breakouts’ or stocks making new highs over x number of days is a valid strategy and one that was made famous by the “Turtle Traders”. Volume is an important characteristic when looking at stocks that are breaking out to new highs. Before entering on a breakout, ask your self - is there significantly high volume pushing the stock to new highs. I like to see twice the daily average volume over the past 15 trading day. I also like to see that buyers are in control of the stock into the close. This means that the close minus the open is greater than the high minus the close.  Plus, the trend must be in the direction of the breakout. It’s important to note that a breakout strategy can be painful with about 60% of all breakouts being false. The edge, or positive expectancy is provided by the size of wins proportionate to the size of losses. Without taking into consideration volume or momentum to support the breakout, the percentages would be even lower. 

Soldiering on with the assumption that we’re at the start of a major bull run, and understanding that their will be bumps in the road along the way, we need to understand when selling pressure is bearish or bullish. If a stock pulls back, we look for the pull back to occur on declining volume to be comfortable the stock is trading inline with the general flow of the market. If the volume intensifies, look more closely at the second day of declines. In a lot of instances, stocks that have been trading in an uptrend for quite some time, can have a ‘blow off’ day where traders will panic to lock in profits. Although its very hard to do, it can be beneficial to wait for a second day before making a definitive decision on the best way forward. This can be seen in Extract Resources (EXT) during its recent run higher. It has paid to take a step back and monitor the volume on any pullback that has occurred.

Although volume is only one part of the puzzle when it comes to analyzing stocks, it’s often an under utilized indicator that can give real insight into the flow of smart money.  

Key Principals; 
 

1.  Volume should increase as a stock makes new highs. I like to see 2 times the average volume over 15 trading days

2.  A pullback on light volume can often be bullish

3.  A pullback on high volume is bearish however it’s often beneficial to see how the stock settles on day two of the pull back. – note this does increase the risk

4.  Volume spikes (days of super high volume) are worth scanning the market for. 10 times average volume should suffice.

5.  Steady volume when a stock is trading in a channel equates to accumulation. A break to the upside is likely.

By James Gerrish