Credit: Shutterstock photoPrice and volume are the guitar and bass of stock trading. You really need both to rock 'n' roll in the market. Without sufficient trading volume, price may fall flat at key inflection points as you enter a trade.
The volume requirements at those inflection points depend upon the time frame of your consolidation. Your typical cup-with-handle base requires a duration of seven weeks. Volume at the buy point , in that case, should generally be 40% to 50% above the average volume over the last 50 days. Since swing trades rely on shorter periods of time, the volume thresholds can also use shorter periods. A 10-day consolidation with volume at the highest level of the entire consolidation is often enough. It's more telling than a comparison to the 50-day average volume.
But when a stock sets up over multiple time frames those thresholds require an adjustment. A cup-shaped pattern over the span of three weeks may be part of the handle in a larger 12-week cup with handle. In that case, the volume at the buy point should have volume approaching the higher threshold of the longer time frame.
Take AbbVie ( ABBV ) during its recent consolidation. It tried to breakout on Dec. 1 (1) but couldn't gain traction as market conditions deteriorated. Its pullback remained mild and joined the SwingTrader watch list as the stock consolidated and got support at its 50-day moving average(2) . The buy point was set at 98.53, the previous high.
An eight-day consolidation formed in AbbVie and on Dec. 13, it crossed the buy point (3) . However, intraday volume was weak throughout most of the day. Even a huge spike in the final half-hour of trading only put volume at 12% above its 50-day average. That might have been acceptable for the short consolidation as it was the highest volume in the last eight days. However, because the short consolidation was part of a larger base more than seven weeks long, our expectations were higher. We sent out an alert to subscribers that morning: AbbVie would remain on the watch list but wouldn't be a buy yet due to a lack of volume.
A weak close on the day, followed by a loss of more than 1% the next day (4) , confirmed the validity of the decision. The stock remains on the watch list as an improved market may give the stock another chance. It's hit resistance just above 98 three times. So a break above that level would be meaningful, especially with volume.
More details on current and past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
