Wednesday, November 17, 2010
Volume - Above average volume tells you there is heighten interest in the stock for the day. Compare today's volume against a given time period to see if the stock is up on higher than average volume. Normally, I use a 50 day average volume indicator.
Price - While today’s price matters, it has more meaning in the context of the price action today compared against the past week, month, or year. Depending on how a stock moves today compared against those time periods, you can get a shift of expectations from the market.
Low Float - This is one of the secret ingredients that can propel a stock faster than others. Float is the number of outstanding shares available to the public for trading. Less supply combined with more demand will drive a stock price higher and faster. Why is there more demand? At some point, there is a Shift in Expectations for the stock.
Shift in Expectations - A Shift in Expectations from the market is what drives a stock from a sideways or neglected price pattern to an uptrend. A shift in expectations can occur from news driven events like earnings or simply from the stock making a new high.
For instance, if I’m watching Stock A which has been consolidating for 4 weeks and suddenly it breaks out of that pattern on above average volume, my expectation for that stock has just changed. I’m sure other traders that were watching the stock had a similar shift in expectations.
While there can be news driven events that can cause a Shift in Expectations, the truest indicator is volume and price and how they are acting compared against different time frames.
Price and Volume act as a predictor of increased demand. Many times, price and volume will pick up before the news event occurs. If you’re waiting for a news event you can miss a majority of the move because many times it will be priced into the stock.
A few other items that can cause a Shift in Expectations are earnings guidance, sector strength, or a new ETF coming out around a specific sector (example: Mining and Minerals). The shift can occur from things that seem mundane at first glance, so focusing on the price action of individual stocks can keep you attuned to where the money is flowing.
In the end, the Expectations for a stock are what drive price higher. At some point a shift has occurred where market participants think the stock is worth more than what it was yesterday. Whether their hypothesis is true does not really matter, it is causing more demand for the stock. Things like earnings surprises or guidance can tell us why, but in many cases the moves are more subtle and you have to rely on price and volume for the clues.