Hey, this is Sasha Evdakov, Founder of tradersfly.com, where I share with you some insight about trading, investing in the stock market.
Now at tradersfly.com, I’ve created this website so I can share with you some common questions that people asked me. And this week’s issue is how you can tell when the volume is drying up for a breakout or a breakdown?
It’s more of technical analysis question.
Take a look at what volume tells you
First, before I share with you some examples on the charts, let’s take a look at what volume tells you? Well, it shows you the energy of a stock move, and if a move is real. The more volume a stock has on a break, the more likely it is to stay above that break.
Let’s go to the charts and see this in real-world examples and situations.
Here, if we look at Tesla, you can see that we’re looking at a chart that’s a monthly chart, for the time being, if I put it into a weekly chart and zoom out, you can see the volume here towards the bottom. And as I stretched it, you’ll be able to see the overall volume picture of how that looks.
When I go back from a weekly to a monthly chart, you can see the volume bars start shifting. Looking at this between the weekly and the monthly, you’ll see that the picture of the volume begins to change. Now, looking at Tesla, you can see initially we had a consolidation pattern or an accumulation phase right around 2012 to 2013.
And then when volume comes in, what happened? It was buying volume.
Then, what is the stock doing? It breaks those levels on huge green volume.
You can see that the volume starts to pick up, and if we zoom in you’d be able to see that real carefully. You can see the volume here, and we have a twenty-day moving average. Why twenty? Twenty trading days in a month, excluding the weekends and so forth.
You can see the volume starts to pick up right here and more buying comes in. The stock continues to explode higher, after a certain period where a stock price gets overextended that stock is ready to do what? Pull back.
We know stocks don’t go straight up, when is that pullback coming? Then when it starts coming, what happens?
The volume starts picking up to the downside. And you can see that initially right here in May and June we have positive volume. But if we look at right here, you’re starting to get a few weeks of variation, the negative volume now you still do have positive bullish volume in August and September.
But right around September, October you see a few more of bare space between selling starting to pick up. That’s why the stock is starting to break down a little bit. You see, there are higher spikes above that average is the higher peak right there above the recent average volume in the green bars.
If you start looking at this, you can see it pulls back, and then the stock builds for the next like higher. So what do we get before we get that next like more top? If you take a look at it, you get this drying effect of volume. You can see the volume dries out right there, right around this level.
We dry out, and then the stock builds for the next like higher. And volume picks up and accelerate. If you’re good at reading chart patterns, this is an A to B, B to C, and C to D pattern.
What happens next when the A, B, C, D pattern is complete?
Once an A, B, C, D pattern is complete, something new happens. And in this case you can see – okay, let’s take a look, zoom back out. You see we have that A, B, C, D pattern all the way to the left and now we get sideways action and then what happens next?
Well, now we’re moving sideways. We could potentially move higher, or we could break down, it just depends where this range comes and play.
And if we go back to the weekly, you can see this A, B, C, D patterns that happened as well in a shorter-term trend. Here, you have kind of A to B, A to C, C to D.
What happens here is when we have these little levels that the stock tries to get into for power higher but couldn’t do it, how do you know what’s not going to do? Or what’s the chance or percentages, and how do you spot those things?
Notice all the more significant volume spikes, and this is just an initial key for you as you get better at chart reading, more things play a role in this decision-making process.
You’ll see that there’s a lesser volume that comes in as that stock is trying to break higher, less bullish volume. Then as we try to break this price level, there’s less sell in volume. If you got buyers that step in, it’s all about supply and demand.
As we get up here, again we get sellers stepping in okay? We come back down into the price level here at about 175, you have a lot of sellers, but then buyers slowly step in real quick.
We take it back off and then what happens, sellers pick in, step up again.
This happens a lot in many different stocks if you look at when. This one has had the same kind of concept. We have an A, B, C, D pattern, if we take a look at this right here you could see we have an A to B, B to C, and C to D. And then what does this stock do? It comes back.
Almost to this price levels, it’s almost to the lowest to the C but even lower. And then we base on it, and then the stock breaks out. Why? You have an overextension to the downside. After a while, that volume builds and picks up.
You have to think of it like a rubber band and how far stretched are we? And if you look more on a weekly basis, you could see we create a lot of little A, B, C, D patterns right there.
When we have a sideways consolidation and then look at what happens to the volume. Initially, here, we have a lot of bars and colors if you look at it which color do you see more, right there? Well, it’s more of a red color.
However, as we start getting into this level, you can see the overall color is green and get a lot of green buyers stepping in. So that will push that stock higher. The more buyers, the more fuel that stock will have. And this happens in many companies and many stocks.
The Rubber Band Effect
You can see the difference here as we look at the volume overall we have a lot of buying volume that makes it a little bit thicker — a lot of buying volume coming in right there, drying up area or some selling pressure coming up here.
Volume dries up in this level which is the peak over here in the stock. What happens when volume dries up? We get some selling action, so stock sells off. And we continue to move higher, and there’s our B to C leg or C to D leg. And this leg, you could see the volume dries up. It’s starting to dry up. And once the volume dries up and you get too far extended we just over here, way overextended, what does happens to the stock?
It sells off and then it takes time for that to sell off to reverse direction, volume picks up and then finally after a lot of selling takes place, and all these other people sold you get this volume coming back in into the buying side. And that is only because of the rubber band effect, and it happens in all stocks.
And if you look at Apple, the same thing happens, you got the A, B, C, D patterns. Okay, so we have an A to B, B to C, C to D and we’re trying to hang on to these levels.
If it breaks, chances are it will come down to $50 level of somewhere around there and look at the volume, and it’s drying up.
We’ve had a lot of inflow on volume with the few selling areas, but overall the volume has been drying up, and we’re getting some selling coming in.
Nature of Price Movements
If you start seeing more volume coming this way, especially on the cell side if you see that stock had a little bit lower to find an excellent level where it becomes a value buy and you can it bounce and hit higher again. That’s what happens when the stock gets overextended to one side, and you get a selling pressure coming in, then it gets oversold, and then you get buying coming in as well.
So that’s what exactly what happened right here when you look at it on this B to C leg, you can see right there we have that A to B, and then that B to C leg because it was overextended at the B. You’ll look at this price expansion to the upside. It’s too far extended, and then it will come back and then we can move higher the same thing.
And we have to come back to move higher. It’s just a nature of price movements.
In general, you’re just looking for overextended moves whether that’s to the downside or the upside. If you understand what is real or realistic, you will have a better idea of knowing when a stock will pause or reverse.
Remember that stocks break out, pause, retrace and then move again whether that’s to the upside or downside.
Looking at multiple time frames, we’ll help you with this. You can also see at Bollinger bands as well to help you dictate or see where things are overextended from one way to another place.
Final Thoughts
Some final thoughts, much of spotting price action takes time and practice. And it takes the time to look at more charts, find trends, and see if you can predict stock movements based on volume.
245 Money making stock chart set up books
What I’ve done to help people practice this thing is that created my 245 money making stock chart set up books which focus a lot on looking at charts specifically. And it’s all books just 95% of them charts. It’s not about reading, and it’s about reading the charts and looking and practicing the charts.
Similar to how you’re looking at charts right now on the screen. I’m going to share with you where to add, how to look at resistance lines and support lines. And just looking at patterns and the better you look at patterns, the more patterns you look at, the better you’ll get at learning charts and reading those charts.
It’s just like learning how to read better, so the same thing with these books, that’s what really what they’re all about. Take a look at those books if you’re interested in practicing more about your technical analysis.
