Stocks hitting new highs sometimes set off attractive buy signals. But when a stock hits a series of new high in low volume, it may also signal it's time to sell at least part of your investment.
XVolume is a proxy for institutional investors. The massive trading power of mutual funds, endowments and other major investors leaves a footprint on charts through big volume. That's why tall volume bars offer clues on a stock's direction.
The study of volume is important when you evaluate bases. You want the base to have at least as many up weeks in high volume as down weeks. In other words, you want more institutional buying than selling when a stock goes through one of these crucial consolidation periods.
Volume also can help identify when a stock's run is ending. One bearish signal is when volume starts trending lower while the stock price continues to climb. This divergence tells investors that institutional demand is drying up, and it can be found in the tops of many market winners.
Rules For Selling Stocks Can Depend On Volume
It's best to use a weekly chart to identify this sell signal. The divergence between price and volume will occur over a period of at least several weeks. This normally happens when a leading stock has made gains from its most recent breakout.
Chinese online retailer JD.com (JD) more than tripled from an initial breakout in November 2019. In the early part of 2021 — after the stock had broken out of a cup base in early January — the warnings signs appeared.
JD.com made new highs into the middle of February (1). But while the stock acted bullishly, volume was fading. Five of six weeks saw volume trend lower, including the week of Feb. 12, the smallest weekly volume in at least two years (2). The only week with high volume saw the stock make a bearish reversal — another bearish volume signal.
The stock rolled over in the second half of February 2021, later sinking below its 10-week and 40-week moving averages.
Using Charts To Identify Sell Signal
It's always good advice to look at the MarketSmith or IBD Charts. These tools provides a volume bar chart at the bottom of each stock chart.
The 10-week average volume is plotted with a red line over the volume bars. And, the top right-hand corner lists the daily trading volume in both numerical form and as a percentage.
Remember, the key to investing in stocks is not just how to buy them, but also when to sell them.
Damage control is one of the first lessons learned when studying the CAN SLIM method. And it's especially true when the market is in a major correction.
Finally, here's a specific rule to help boost your prospects for long-term stock investing success.
Once your stock has broken out, take most of your profits when they reach 20% to 25%. If market conditions are choppy and decent gains are hard to come by, you can also exit the entire position.
If market winds are favorable and your stock appears to be in the early stages of a bull run, still go ahead and sell at least part of the position, such as a third or half, to lock in gains. A 20% or higher profit often happens before you face a volume-based sell signal.
Follow Michael Molinski on Twitter @IMmolinski
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