An Important Indicator Confirms Your Trades
The Dynamic Wealth Report
July 28, 2010
by Justin Bennett, Editor
Imagine a scenario if you will…
Two new yogurt shops open directly across the street from each other.
The stores have only been around for a few weeks. The owners were
unaware of the impending competition across the street. (I know, I know…
this is highly unlikely, but I’m trying to make a point!)
One day you get a hankering for some smooth frozen yogurt. Luckily,
you’re right down the street from the yogurt shops. It’s a hot day and
you’re ready for some frozen yogurt delight.
As you arrive, you notice something. One store has a line out the door.
People are waiting to get in…
The other yogurt store is open too, but there are only a few people
inside. You’re stomach’s grumbling and you can’t wait to taste the
refreshing creamy yogurt.
So you forgo the busier shop due to the long line. You waltz right in
the nearly vacant yogurt store.
You order up a triple raspberry delight with a twist on top. Your mouth
is watering as it awaits the refreshing treat. But as the spoon enters
your mouth, you notice something.
Your raspberry delight tastes more like brussels sprouts puree…
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Your stomach wrenches as you spit the chilled muck back in your cup. You
quickly realize why this new yogurt store is nearly empty… the yogurt is
disgusting.
And now it’s obvious to you… the yogurt across the street must be a
whole lot tastier. That’s why there’s a line out the door!
By observing the crowd, you could’ve saved your tongue from a near death
experience.
It’s the same with trading…
By watching other investors trade a stock, you can get some very useful
clues. It’s important for technical traders to watch crowd behavior…
especially at important support zones.
And this is where volume comes in.
Volume is an indicator measuring the interest in a stock. In other
words, volume shows the amount of crowd participation over a period of
time. The more shares change hands, the higher the volume. Higher
volume at certain price levels can mean more commitment of capital at
those levels.
And that’s just what you want to see when you’re putting money to work.
You want commitment to a trade from a large number of market
participants.
Let me show you what I mean…
This is a chart of
Baker Hughes (BHI). BHI is in
the oil services industry. They do much of the essential support work for oil exploration
companies. With a market cap of nearly $20 billion, they’re one of the
big boys.
Take a look at the green line in the chart…
It’s the $36-$35 support zone. You know it’s an important price area
simply by watching the price action and the volume. Notice how BHI
reacted at the $35 level in September of 2009 (the left circles). Volume
jumped significantly.
Remember, high volume means a lot of shares were changing hands. Seeing
volume spikes at a support zone is important. It means the buyers who
bought the support level with force are likely to “protect” it in the
future.
Now take a look at the right circles…
BHI approached the same price zone of $36-$35 during the early days of
the Gulf oil spill, the same area where volume spiked in 2009. Notice
the heavy volume coming back into BHI as it trades in the support zone. The $36-$35 area is bought with force again.
And now BHI is trading near $50, up nearly 38% from the $36 support
zone…
Do you think using volume in your charts might be rewarding? I think so.
The bottom line is this…
By watching price action and volume, you can get essential clues on
buying and selling activity. Keeping an eye on crowd behavior is
an
essential part of short term trading… and finding good yogurt.
• Lumber (Over $200 per thousand board feet)
Lumber prices are stabilizing in recent weeks as housing industry news
remains mixed. New home sales rose 23% in a recent report. But the total
number of new homes on the market in the U.S. is the lowest since 1968.
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