Over the past few weeks I have heard frequent complaints from traders regarding the lack of volume in the market. We all know that complaining and making excuses are nothing new to trading. Market composure changes often and frustration will forever be a part of the job we all love.
While the volume may indeed be “light”, the ranges have been large and the opportunity ever-present. Even in the over-hyped “slow” month of August, opportunity was plentiful and many traders had great months. The difference between traders who made money versus those who lost has very little to do with light volume and everything to do with stock selection. Where you decide to concentrate your attention and capital means everything if it is alpha you are seeking.
Volume is relative. Sure total market volume may have been lesser than the norm in August and early September. That being said, each and every day there were select stocks doing above average volume. These were the stocks to be in, and that’s why stock selection is key in light volume tapes. The catalyst for the volume spike may be earnings, news or the increased buying or selling near a technical level. As technicians, the reason is of no consequence to us. The price action and volume are paramount.
During our seminars, I often receive the same question over and over again. “Aren’t game planning and stock selection the same thing?” The answer is certainly not. While we may look for patterns, highlight levels and study moving averages during game planning, stock selection happens when you decide to buy 2,000 shares of xyz and only 500 shares of abc. Game planning is akin to building the offensive playbook while stock selection is the on-the fly, in-game play calling. You can prepare all week for Sunday’s game but you have only 40 seconds to decide whether to go for the first down or punt on 4th and short. That is the difference between game planning and stock selection.
So the market opens and you are watching 5 stocks that you game planned for? Which one or two should you go after?
Let Share Volume Guide You
Think of volume as the gasoline to your Maserati. With no gas, you won’t go very far no matter how fast or expensive your car is. With a full tank (above average volume), you have the potential to travel farther(range expansion) and faster(momentum).
One of the primary indicators for me is individual stock volume before I decide where to concentrate my focus and capital. Stock volume is independent of total market volume. If a stock is doing above average volume, I know I can trust the move, can look for momentum and should expect range expansion. This is where my focus should be on any trading day but is critically important on light market volume days.
Trade the Easy and the Obvious
I referee high school football games on weekends and the experience has been much different from my playing days. One of the best pieces of advice I received when I first started was to only throw my flag for “the easy and the obvious.” With my mind constantly on the markets, I immediately thought this phrase had direct applications to trading, too. Nobody is forcing us to participate in the market and make a set number of trades. In other words, we can pick and choose our spots.
Trading the easy patterns or your go to patterns will give you an edge. Trading the obviously weak or strong setups will add yet another edge. Align this with the correct volume analysis and you are setting yourself up to reap consistent profits.
As I’m sitting here writing this article, I am long CMG and short GS. Why? CMG is a strong stock on the daily. Now look at the screen shot above. GS is in the lower left hand corner while the SPY is in the bottom right. The market gapped down and has printed 8 green bars in a row to fill the gap. GS is trading sideways and is yet to attempt to push into the gap (it is the obviously weak stock). Volume is above average (see yesterday’s afternoon volume). Do I know which way the market or GS will go from here? Certainly not, but having done the proper analysis, I will make money whichever way the market decides to go and my eye will be on GS!
Good luck trading this week, I am heading across the pond for vacation, and I will be back middle of next week. I’m pretty excited about seeing my first English Premier League soccer (football) game, Manchester United vs. Liverpool at Old Trafford! Don’t forget to RSVP for the open house at our downtown Manhattan office Wednesday, September 22nd at 5pm.
