It's one thing to identify a base on a stock chart. Identifying its good and bad parts is another. That's a process in stock analysis that requires studying each week in the pattern.
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"You want to judge how much price progress up or down the stock made during each week and whether it was on increased ordecreased volume from the prior week," IBD founder William O'Neil wrote in "How to Make Money in Stocks."
Generally, you want to see up weeks in higher volume and down weeks in lower trade. Alsolook for churn, or heavy volume with little change in stock price. This type of action can signal a change in direction for stocks, either up or down. It tells you momentum is halting.
On weekly charts, look for weeks with above-average or sharply higher volume than in the previous week. In the same week, watch for price declines that are much smaller than in the previous few weeks. In other words, the price decline slows even as trading remains heavy.
This stock analysis signal is stronger when the stock closes high in its weekly price range and the price range itself is wider than usual.
To be sure, churn is found in relatively few bases. Among the few examples was Franco-Nevada (FNV), the mining royalties company.
Stock Analysis Of Mining Stock
The stock formed a shallow cup-with-handle base in March through May of 2019.
The week ended May 3, 2019, saw volume jump well above average and 70% above prior weeks' turnover (1), yet the stock dropped a mild 0.4% that week.
This was positive churn. IBD's O'Neil had a special term for it: heavy volume without further price deterioration. Franco-Nevada had fallen 1.3%, 4.7% and 0.2% the prior three weeks, so downward momentum was definitely slowing. The base bottomed during these three weeks.
With the firm bottoming in place,Franco-Nevada broke out past a 77buy point in heavy volume onMay 31, 2019.The base was so shallow, it might also have been interpreted as a flat base. Shares surged 31% until the next base started forming in early September.
The flip side of bullish churn is heavy volume without further price progress. You'll see volume spike while the stock struggles to maintain upward momentum. Shares often will close low in the weekly price range. Treat this as a red flag, if not a sell signal.
A form of this characteristic is stalling in the major indexes, and it is found in daily rather than weekly charts. Stalling, a type of market distribution, happens when an index makes a small price gain in higher turnover but closes in the lower half of the day's price range.
This article was originally published June 26, 2020 and has been updated. Juan Carlos Arancibia is the Markets Editor of IBD and oversees our market coverage. Follow him at @IBD_jarancibia
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FAQs
Generally, you want to see up weeks in higher volume and down weeks in lower trade. Also look for churn, or heavy volume with little change in stock price. This type of action can signal a change in direction for stocks, either up or down. It tells you momentum is halting.
What is the momentum indicator with volume? ›
On-balance volume (OBV) is a technical indicator of momentum, using volume changes to make price predictions. OBV shows crowd sentiment that can predict a bullish or bearish outcome.
How to use volume to confirm trend? ›
High volume during price uptrends indicates strong buying interest, confirming bullish trends. Conversely, in downtrends, high volume suggests strong selling pressure, affirming bearish trends. Comparing current volume to historical averages provides insight into market sentiment and potential trend reversals.
How to use volume rate of change indicator? ›
Choose a time period for your analysis (e.g., 10 periods, 20 periods, etc.). Calculate the difference between the current trading volume and the chosen period. Divide the difference by the trading volume from the selected period ago. Multiply the result by 100 to express the VROC as a percentage.
How do you predict the momentum of a stock? ›
The main components to determine a stock's momentum are price movement, current price, and closing price. Momentum indicators are also known as oscillators that are depicted by a line. The price oscillation line is around 100. This oscillation line helps in analysing the stock prices and trends.
What is the most reliable momentum indicator? ›
Moving Average Convergence Divergence (MACD)
Often regarded as the best momentum indicator, MACD is a trend-following indicator. It represents the relationship between 2 moving averages of a financial instrument's price.
How to spot momentum stocks? ›
So, one method of finding momentum stocks could be to run a stock screener to filter all of the stocks trading within, say, 5% of their 52-week highs. Day traders looking for momentum stocks often have their own criteria to help find opportunities (small companies, high volume, unusually high volatility).
What is the rule of volume indicator? ›
On-Balance Volume Indicator (OBV)
It is calculated by adding the day's volume during high volume days into a cumulative total when the currency pair closes higher than earlier and subtracting the day's down volume on low volume days when the currency pair closes lower than before.
What is the best indicator for volume? ›
There are two most popular and widely used volume indicators: PVI (Positive Volume Index) and NVI (Negative Volume Index) that help in volume analysis. The positive volume index is used to measure the positive impact or increase in the trading volume.
How do you trade with price volume trend indicator? ›
The basic idea behind the indicator is to multiply the market's volume by the percentage change in the price over a given interval (usually daily). If price declines, the indicator's value goes lower due to the negative value. If price increases, the indicator's value goes higher.
Volume can be used to confirm price action signals and validate the strength of market trends. For example, if an uptrend is accompanied by increasing volume, it suggests a strong and healthy trend. Conversely, if an uptrend is accompanied by decreasing volume, it may indicate a weakening trend.
What is the indicator of volume change? ›
The volume rate of change is the indicator that shows whether or not a volume trend is developing in either an up or down direction. You may be familiar with price rate of change (discussed here), which shows an investor the rate of change measured by the issue's closing price.
What is a good volume for stocks? ›
To reduce such risk, it's best to stick with stocks that have a minimum dollar volume of $20 million to $25 million. In fact, the more, the better. Institutions tend to get more involved in a stock with daily dollar volume in the hundreds of millions or more.
What is the momentum indicator strategy? ›
The momentum indicator measures the strength of an uptrend or downtrend based on price movements, and can determine how overbought or oversold an asset is. It can also be classified as a leading indicator, rather than a lagging, as it helps to generate buy and sell signals before a trader opens a position.
What is momentum stock picking strategy? ›
Successful momentum trading involves identifying strong price momentum, selecting appropriate technical indicators for market analysis, such as the RSI and MACD, and setting trade parameters including strategic entry and exit points, stop losses, and position sizes relative to a trader's risk tolerance.
How do you set a momentum indicator? ›
Investors can calculate momentum by measuring price differences over a specific time period. For example, a 10-day momentum indicator is calculated by subtracting the closing price of 10 days ago from the current closing price. The indicator then plots this value as a line on the stock chart.
Is VWAP a momentum indicator? ›
The volume-weighted average price (VWAP) indicates the average price of an intraday period weighted by volume. Here's how to use VWAP in technical trading. Volume is generally considered one of the drivers of momentum, which is why some chartists keep an eye on volume regardless of what indicator they're using.
What is the momentum measuring indicator? ›
Momentum indicators show the movement of price over time and how strong those movements are/will be, regardless of the direction the price moves, up, or down. Momentum indicators are also specifically useful, as they help traders and analysts spot points where the market can and will reverse.
What is the indicator for volume? ›
There are two most popular and widely used volume indicators: PVI (Positive Volume Index) and NVI (Negative Volume Index) that help in volume analysis. The positive volume index is used to measure the positive impact or increase in the trading volume.
What is the indicator for volume change? ›
The volume rate of change is the indicator that shows whether or not a volume trend is developing in either an up or down direction. You may be familiar with price rate of change (discussed here), which shows an investor the rate of change measured by the issue's closing price.
