Continued reading from Tape Reading and Market Tactics.
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Chapter 5
Turning Points on Heavy Volume
Heavy Volume But No Headway
Heavy volume at the end of a move is extremely important, inasmuch as it generally indicates a turning point in the market. In this situation, on the upward side, we have volume during the advance with continued, increasing activity of transactions at the top without stocks making further headway. In other words, our buyer wants more stock and continues to enter order after order; meanwhile, our seller, who previously would sell only on advancing prices, now offers for sale great quantities of stock. For a time there is a tug of minds between buyers and sellers, but this extreme activity near and at the top is indicative of a substantial reaction to follow.
This is true, likewise, at the bottom. You are familiar with some of the turning points of the declines in 1929 and 1930, when volume increased tremendously. June 18, 1930, furnished an example. On that day more than 6,000,000 shares changed hands. Late in the day a rally set in, and soon buyers were bidding for stocks, whereas just before that all the weight was on the side offering stock for sale. There were many of these volume days during 1929 and 1930. September and October, 1929, witnessed this churning of stocks at the top.
Lesser movements are marked by the same characteristics. I have mentioned these big days because the illustration is clearer.
Let us run over these first two phases of volume action and translate them into terms of human action.
Volume Indicating an Advance
During the rally, what has been going on? Two things: first, the buying of stocks by those who are covering their previous short sales; and, second, new buying by those who expect the advance to continue. Both factions are spending their money to purchase something; but one faction is closing out a transaction, while the other is entering one. The man who covers his short position is in a greater hurry than the long buyer. The short seller will rush to cover if he believes that the rally will endure for some time. If you are contemplating a purchase (likewise, if you consider selling stock which you own), you are interested in both of these opinions—the judgment of John Smith, who is short, and that of John Jones, who is buying stock to hold for the advance. You would like also to determine whether there are many more Smiths than Joneses—more short-coverers than long buyers—because if the rally is due mainly to short-covering it is likely to be brief, and may be followed by further declines.
How can you tell which it is? Watch the volume and, in this situation, the rapidity of price changes. If you are considering purchases, you will probably not be in a rush; and, furthermore, you will not wish to buy if you feel that an order “at the market” may be executed at two or three dollars per share more than you see on the tape. On the other hand, if you are short, and feel the decline has spent itself, you will place your buying-orders at the market, satisfied to get out with your profits.
Let us assume that you sensed the turn at the bottom and purchased two or three stocks. Your interest now would be to decide whether to hold for a sizable advance, or to throw out your stocks if you misjudged the turn in the trend. Your problem then resolves itself into determining whether good buying comes into the market along with short-covering. (By “good buying” is meant purchases made by those who are in a position to know the underlying conditions of the market, and also the buying done by those who are sponsors of certain issues.) You notice large blocks of stocks taken at steadily rising prices. At intervals, the market becomes quieter, with less volume and fewer transactions; yet you notice that coincidentally there is very little weakness apparent; that reactions are on transactions of only 100 to 1,000 or 2,000 shares: there are few huge blocks frequently changing hands at lower prices.
