Volume Precedes Price (PIR,XLK,KBE)
It’s axiomatic among market technicians that volume is the key ingredient behind price changes. On the one hand, it’s a purely economic equation, the greater the demand for an item, the higher it’s price will move, given a static supply. Conversely, when demand dries up, prices should be expected to fall, or stop rising, at least, as the catalyst for their advancing in the first place has now been removed.
But does that always translate in the world of equity trading? And how can the volume action on a stock or sector, or in the overall market, help us to make better trading decisions?
Glad to have you.
A number of people have attempted to probe the matter, and in the most fundamental sense, traders should be aware of potential tops and bottoms every time they see a genuine swell in trading activity.
Accumulation and Distribution
Two terms that define the technician’s understanding of volume are ‘accumulation’ and ‘distribution’.
When the so-called smart money is loading up on a stock at the bottom of a downtrend, the term ‘accumulation’ is attached to it. And conversely, when the bigshots are selling their holdings at the top of a move, we term it ‘distribution’.
Below is a chart of The United States Oil Fund (NYSE:USO) during a particularly dramatic spill into the start of 2016. Notice the enormous rise in trading volume as the plunge progresses (in blue).
Had you been a buyer at the lows, you would be sitting on a profit of nearly 50% today.
Have a look now at the long term chart for silver, a commodity that peaked back in 2011 amid a buying frenzy as frenetic as any ever charted.
Again, the surge in volume into the final, frothy parabolic blow-off top was your cue as a trader to get out and go short.
And if you did, you made off like a dirt devil in a convent.
So what about today, Matty?
Today we’re looking at a volume surge the likes of which we haven’t witnessed for better than eight years. Since the election, trading activity has been running at literally triple the pace it did for the previous half decade.
A look at the chart of the Dow Jones Industrials over that time frame tells the tale eloquently.
Here it is –
The price surge apparent in the chart comes as a function of the election of Donald Trump, a fact that even the most hard-core Hillary supporters now admit. But while the Trump-philes claim it’s only the beginning, others see in the latest spike a pattern reminiscent of the silver chart (SLV) we produced above.
So which is it?
Is this accumulation or distribution?
And can accumulation occur eight years into a bull market?
As to the latter question, the answer is yes. Any number of factors can trigger an extended period of equity buying, not least of which is a new legislative agenda that Wall Street considers business and consumer friendly.
We saw this, by the way, back in 1994, when the so-called Gingrich Revolution took both houses of government during Bill Clinton’s first term. The market loved it. Prices shot through the roof and didn’t stop until the dot.com bubble popped some six years later.
Now, we see earnings surprising to the upside at a better rate than any time over the last six years.
Have a gander –
We see a housing sector that’s also caught the flame and is now starting to burn hotter.
Consider – last month’s existing home sales numbers came in better than they have since 2007, and median prices jumped by better than 7% year-over-year.
We take these, and other indicators to mean that the equity market has yet to peak and that the latest burst in volume is a bullish marker. We would expect daily truck on the NYSE to average better than half a billion shares on a daily basis before the top is reached.
And that’s yet a ways away, friends.
Close ‘em Down, Open ‘em Up
We’re going to close out our January 26th trade that pitted the banks, as represented by the SPDR S&P Bank ETF (NYSE:KBE), against the tech sector’s Technology Select Sector SPDR Fund (NYSE:XLK). The letter was called Spot the Wise-Guy, and there we urged you to sell the KBE February 17th 45 CALL for $0.45 and buy the XLK February 24th 51 CALL for $0.50. Total debit on the trade was $0.05.
Last Friday, the short KBE option expired worthless, while the long XLK – open through the close of this Friday’s trade – still has $1.53 worth of value.
Our opinion? Take it. You have no idea what will transpire in the next 24 hours and it could be the option gets wiped out completely.
Don’t let it happen. Dump it.
And while you’re at it, call it a net gain of $1.48 on a nickel expended, or 2960%.
Hope you went in big.
Next was our February 2nd venture, in which we recommended you sell a February 24th 240 call for $1.95. The letter was called Running Numbers, and it’s gone super-sour since we initiated.- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]
As for this week’s trade, we’re returning to the above mentioned homebuilders sector and trading home décor importer extraordinaire, Pier 1 Imports (NYSE:PIR), whose stock has led a wild dance higher since the Trump team took the oval orifice.
Have a look –
Support looks reasonably strong at $7.00, with all the moving averages turning higher at that point. And as we see gains for the sector over the next six months, we’re doing this –- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]
Many happy returns,