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Tuesday, February 18, 2014

Abnormal Price/Volume Action

Today we are going to talk about price/volume behaviour on pivot points.
Starting from our watchlist of leaders, those unique stocks that have EPS and sales growth above 30%, we need to follow them to have a preview of what the market is going to do next. That's why they are called leaders or growth stocks. 

What we want to see on their charts is base formations: we can see flat bases, bull flags, cup with or w/o handle, 3 tight weeks, etc. The longer the base the more solid is the base. We want to see from this leaders when the overall market starts a new uptrend to breakout from these bases. That is when we know for sure that the uptrend is confirmed. When the big boys with the big bucks start buying these growth stocks.

The key of the reading is the VOLUME when the leaders go through this pivot levels breaking out from their bases. We will use 2 examples from today's action.

$UBNT broke out from an irregular base through the previuos high around 47.60 on INCREASED VOLUME. The more volume above the average, more sure we are that this is a genuine breakout. In this case was almost 4x above average volume, and ended at the round number of 50. Remember round numbers are key psycological levels like in every stock/index.

$GOMO a young IPO formed a cup without handle and broke it around 25 level with 2x above average volume.

Both of this stocks are leaders, that clearly are outperforming the indexes and we can see on the volume that the demand of this stocks is pretty clear. Stocks as well as any product from the retail industry, when demand increases above the supply the price tends to rise by its own nature. The supply/demand theory from economy I from school works very well with stocks. And we can check looking at the big winners from the past. Everyone of them had an abnormal demand from the stock before it starts the big move.

That is were the big bucks are waiting for us. Watch the price/volume action through key levels. Trust the supply/demand theory. But because the market can be tricky sometimes we must always cover our buys with stoplosses to limit our risk.

Have a great week all and as Livermore use to say "ride 'em until they stop moving"

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