Understanding the Price-Volume Action and its Importance

X-rays and brain scans are "pictures" doctors study to diagnose what is actually occurring in a human being. Maps are plotted and set to scale to help people tell exactly where they are and how to get where they want to go. The price and volume action/history of a stock helps determine if a stock is strong and healthy or if it is weak and behaving in an abnormal fashion
 

Generally, people focus only on price action. But, the price changes in a stock tell you only part of the story. To get the full picture, you need to also check the volume. Institutional sponsorship, or the number of funds having positions in a stock and the size of positions they have, is an important determinant of a stock’s movement.

A stock with sound fundamentals and good overall health starts to rally after a number of institutions like mutual funds, and hedge funds feel convinced with the company’s story and take sizable positions in it. On the other hand, an exit by one or more institutions may cause the stock to plunge. Therefore, in order to earn stock returns efficiently, one must learn to track the buy/sell actions of institutions.

Using charts to track price-volume actions

Paying close attention to price-volume action in daily as well as weekly charts can reveal whether institutions are entering or exiting the stock, and can help you decide whether its time has come or not.

Daily Charts:

In daily charts, movements accompanied by heavy volumes are usually the hallmarks of institutional activities. A daily gain on heavy volumes (above average) will indicate that institutions are adding that particular stock to their portfolio. A good benchmark to indentify heavy volume is the 50-day moving average. Stronger the volume, greater is the participation from institutions.

Weekly charts:

In weekly charts, one can look for accumulation day and distribution day counts to have a sense of institutional buying/selling. Recurring positive weeks with higher-than-average volume increase the accumulation day count and indicate institutional demand. On the other hand, negative weeks with stronger-than-average volume would mean institutional players are exiting their position in that particular stock. With respect to your portfolio, you would want to add a stock which is being accumulated by institutions and be cautious about one that is undergoing distribution.

Example

In the Laurus Lab chart, it can be seen that the stock was making new high on higher volume, indicating strong accumulation. In the Titan chart, it can be seen that new high on low volume was a sell signal.

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