An Excellent Stock Chart Pattern Has Volume Dry-Ups In Its Base
INVESTOR'S BUSINESS DAILY - investors.com
Growth investors tend to focus on volume spikes in stock charts. They look for explosive trade at the breakout and heavy turnover on up weeks within a basing pattern.
That's all well and good. But a superior price base also has areas where boring is better. Quiet trade can reveal institutional support just as much as high-volume flares.
When you study a chart, look for areas of dull, tight trading. Volume may swing wildly as the stock corrects, shaping the left side of its base. Once it finds support at the bottom, turnover should dry up. On a daily or weekly chart, the volume bars tend to fall below the 50-day average. That means sellers are no longer overtaking the buyers. Institutions can then really begin to prop up the stock.
It's even better if the stock shows tight closes from week to week at that point. Small price variations on a daily and weekly basis are a strong clue of support from mutual funds.
A good handle also shows quiet trade. You'll generally see heavy upside volume as the stock climbs the right half of a cup-with-handle base. Once the stock rallies to within 5%-15% of its 52-week high, it'll decline gradually on quiet turnover. That's the handle. It should last a minimum of five days and slope downward, not wedge higher.
The breakout occurs when the stock soars past its pivot — 10 cents above the handle's peak — on volume at least 50% above normal.
Nam Tai Electronics notched an all-time high of 34.70 on Feb. 11, then began building a base. The maker of electronic components such as LCD panels and cell phone battery packs claimed steady IBD scores at its breakout. Its EPS Rating was 78, its RS Rating 85. Profit had grown 115% the most recent quarter, revenue 72%. The firm's Accumulation/Distribution Rating of A indicated mutual funds steadily bought shares.
The stock spiked down 17% on massive trade Feb. 18 1 , but then righted its ship. It found support above its 200-day moving average (not shown on chart) and started trading sideways as volume turned whisper-thin.
From March 3 to April 7, the stock marked five weeks of tight closes, all on subpar turnover 2 . As it started climbing the right side of its pattern, up days on above-average volume far outnumbered down days.
Volume dried up again as the stock paused around 30 and formed a two-week handle 3 . On May 29, Nam Tai took off, streaking past its pivot point of 30.08 on heavy trade 4 .
The stock peaked at 36.40 on June 6, then started a new handle, offering a second buy point. Volume again shriveled, a bullish sign 5 . Nam Tai exploded past its pivot of 36.50 on June 25, splitting 3-for-1 a few weeks later.
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