It's one thing to identify a base on a stock chart. Identifying its good and bad parts is another. That's a process in stock analysis that requires studying each week in the pattern.
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"You want to judge how much price progress up or down the stock made during each week and whether it was on increased ordecreased volume from the prior week," IBD founder William O'Neil wrote in "How to Make Money in Stocks."
Generally, you want to see up weeks in higher volume and down weeks in lower trade. Alsolook for churn, or heavy volume with little change in stock price. This type of action can signal a change in direction for stocks, either up or down. It tells you momentum is halting.
On weekly charts, look for weeks with above-average or sharply higher volume than in the previous week. In the same week, watch for price declines that are much smaller than in the previous few weeks. In other words, the price decline slows even as trading remains heavy.
This stock analysis signal is stronger when the stock closes high in its weekly price range and the price range itself is wider than usual.
To be sure, churn is found in relatively few bases. Among the few examples was Franco-Nevada (FNV), the mining royalties company.
Stock Analysis Of Mining Stock
The stock formed a shallow cup-with-handle base in March through May of 2019.
The week ended May 3, 2019, saw volume jump well above average and 70% above prior weeks' turnover (1), yet the stock dropped a mild 0.4% that week.
This was positive churn. IBD's O'Neil had a special term for it: heavy volume without further price deterioration. Franco-Nevada had fallen 1.3%, 4.7% and 0.2% the prior three weeks, so downward momentum was definitely slowing. The base bottomed during these three weeks.
With the firm bottoming in place,Franco-Nevada broke out past a 77buy point in heavy volume onMay 31, 2019.The base was so shallow, it might also have been interpreted as a flat base. Shares surged 31% until the next base started forming in early September.
The flip side of bullish churn is heavy volume without further price progress. You'll see volume spike while the stock struggles to maintain upward momentum. Shares often will close low in the weekly price range. Treat this as a red flag, if not a sell signal.
A form of this characteristic is stalling in the major indexes, and it is found in daily rather than weekly charts. Stalling, a type of market distribution, happens when an index makes a small price gain in higher turnover but closes in the lower half of the day's price range.
This article was originally published June 26, 2020 and has been updated. Juan Carlos Arancibia is the Markets Editor of IBD and oversees our market coverage. Follow him at @IBD_jarancibia
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FAQs
Generally, you want to see up weeks in higher volume and down weeks in lower trade. Also look for churn, or heavy volume with little change in stock price. This type of action can signal a change in direction for stocks, either up or down. It tells you momentum is halting.
How to spot momentum stocks? ›
So, one method of finding momentum stocks could be to run a stock screener to filter all of the stocks trading within, say, 5% of their 52-week highs. Day traders looking for momentum stocks often have their own criteria to help find opportunities (small companies, high volume, unusually high volatility).
How do you predict stock price using volume? ›
Trading volume is one of the metrics that traders watch to predict the momentum of a stock or other security. An increasing trading volume might be a sign of favorable sentiment, indicating a likely price increase. A falling trading volume might indicate that the market is losing interest.
How do you predict momentum in stocks? ›
Some of the main tools to measure momentum are the moving average convergence divergence (MACD), stochastic oscillator, price rate of change (ROC), and the relative strength index (RSI).
How to use volume price analysis? ›
Basic Guidelines for Using Volume
- A rising market should see rising volume. ...
- In a rising or falling market, we can see exhaustion moves. ...
- At a market bottom, falling prices eventually force out large numbers of traders, resulting in volatility and increased volume. ...
- Volume can be useful in identifying bullish signs.
The Moving Average Convergence Divergence (MACD) is one of the most popular momentum indicators. The MACD uses two indicators – moving averages – turning them into an oscillator by taking the longer average out of the shorter average.
How do you measure momentum in stock price? ›
Momentum is measured by continually taking price differences for a fixed time period. To create a 10 day period momentum line you would subtract the closing price from 10 days ago from the last closing price.
What is the momentum strategy of stock prices? ›
Momentum traders will seek to identify how strong the trend is in a given direction, then open a position to take advantage of the expected price change and close the position when the trend starts to lose its strength.
What is the momentum indicator strategy? ›
Momentrum indicators are technical analysis tools used to determine the strength or weakness of a stock's price trend. Momentum measures the rate of the rise or fall of stock prices. Common momentum indicators include the relative strength index (RSI) and moving average convergence divergence (MACD).
What is momentum in stock picking strategy? ›
As per Momentum Trading, you should enter a stock when its price has just started moving up and exit as soon as it starts declining. The idea behind this strategy is that the costs of stores often don't reflect their actual value for an extended period, and they tend to move in one direction for long periods.
The best volume indicator in forex is the On-Balance Volume indicator since it gives close to the most accurate feedback after testing significant highs and lows in the market.
How do you interpret volume at price? ›
How Do You Interpret Volume-by-Price Bars? Volume-by-Price can be used to identify current support and resistance levels and estimate future support and resistance levels. Price zones with heavy volume reflect elevated interest levels that can influence future supply or demand (a.k.a. resistance or support).
How to do price volume analysis? ›
Calculation: Calculate the percentage change in volume, price, and mix. Then, multiply these percentages with the respective revenues to determine their impact on total revenue. 3. Interpretation: Analyze the results to understand the contributions of volume, price, and mix to the overall revenue change.
How do you predict market momentum? ›
Some of the common indicators that predict stock prices include Moving Averages, Relative Strength Index (RSI), Bollinger Bands, and MACD (Moving Average Convergence Divergence). These indicators help traders and investors gauge trends, momentum, and potential reversal points in stock prices.
How to find momentum stocks in TradingView? ›
How to Use: Add... Moving Averages (MA): Two moving averages are plotted on the chart: a fast MA (blue line) and a slow MA (red line). The fast MA is calculated using a shorter period (10 periods by default), while the slow MA is calculated using a longer period (30 periods by default).
What is a momentum stock example? ›
There are lucrative profits to be made from momentum investing. For example, say you buy a stock that grows from $50 to $75 based upon an overly positive analyst report. You then sell at a profit of 50% before the stock price corrects itself.
