How Volume Affect Stocks

If price is king, then volume is the queen that is able to heavily influenced the direction of price. Analyzing volume is important because volume often point us to huge moves in a stock before it happens.

Here are some reasons why you should look at a stock's volume:

  • Volume often precedes price
  • Huge volume often hints of insider buying or institutional buying
  • Huge volume often hints of smart money making their moves
  • Unusual volume can ignite a move up
  • Unusual volume can end a move
  • Low volume during tight ranges hints of a big move

In the next few articles in this chapter, we will delve deeper into volume and its effects on stocks. Below is a sample to give you a taste of how unusual volume can move a stock and the market.

In the chart above, you can see how CBS suddenly had a very unusual volume during one week. This volume was higher than normal. The volume was about 9X more than the usual trading volume!

This hinted of huge selling by some interested parties and smart money.  Not long after that, the stock dropped. About a year later, the stock lost almost 40% of its value.

In the chart above, you can see how an unusual volume formed on the daily chart of SPY. SPY is the etf of S&P 500. There was a very large bullish bar on heavy volume which hinted of aggressive buying by market participants. The stock market had a huge bull run in the next 3 months.

That's the power of volume analysis!

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