Tips on Technicals - Volume Spikes
Breakouts
The most common use of sudden high volume is as a confirmation of a technical breakout. Figure 1 shows the stock of Western Atlas gapping higher in May 1997 on a clear volume spike. This broke a consolidation zone and kicked off a five-month rally. Gaps alone are important signals and combined with high volume become very reliable.
Figure 1
A less textbook and more real world example can be seen in figure 2. A mid-December 1996 volume spike in Oracle stock occurred as price gapped down through a supporting trendline. The stock languished for several weeks at the previous support level of 27 1/4 but the high volume gap had changed the dominant trend.
Also on the chart is an earlier gap above the small July-August trendline also took place on high volume but not at a subjectively high enough multiple. This was a break of a consolidation, not a change in primary trend. The later March gap up was not accompanied by unusually high volume since average volume had peaked months earlier.
Figure 2
Selling and Buying Climaxes
A selling (buying) climax occurs after a long downtrend (uptrend) when both price and volume spike. Price reaches a new extreme on a big move while volume rises dramatically. This represents the final selling or buying panic and signals the exhaustion of the selling or buying pressures that created the respective trend.
Figure 3
Figure 3 shows the January 1998 final price drop in Echo Bay Mines on extremely high volume. Note that the single price bar has a very big range relative to all of the bars that preceded it. While the market did not reverse at that time, the supply of stock had finally been exhausted and prices stabilized.
Breakout Warning
Stocks and markets can trade in flat, tight ranges on low volume for weeks, if not months. When volume suddenly spikes up but price does not move, a warning is flashed. A small number of participants have suddenly taken interest in the stock and this is evidenced by the volume increase. However, since information flows are far from perfect, the majority of market players do not follow this lead and therefore do not push up price. Eventually, the "herd" discovers this activity and the reasons behind it, whether they be fact or rumor, and start to take notice. The stock then breaks out of its range.
Figure 4
Figure 4 shows Charming Shoppes in a small flat range in mid-1997. On June 27, volume spikes but the stock was unchanged for the day. Two trading days later, the market woke up, broke out of its range and began a 12-week rally.
Confirmation Required
Not all volume spikes have lasting technical meaning. In the stock market, dividend capture strategies, legal insider activities, options expirations and changes to indices often lead to high volume days. Futures markets also can have spikes during expirations and rollover periods. First Union Corp. volume spiked higher in September 1997 but did not set a new rally high, break from a trading range or technical pattern (figure 5). In this case, it was the result of a pending joint venture.
Figure 5
The bottom line is that volume spikes have different meanings depending on where they are in the charts. They should be used as warnings and confirmations and not as buy or sell signals by themselves.
