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THE MARKET WHISPERER 19 7

How to Interpret Volume Increase Prior to Intraday
Breakout

As noted, a differentiation must be made between volume increase prior
to a daily breakout, and prior to an intraday breakout. At the intraday level,
volume increases prior to the breakout are not usually a good sign, as it
is generally caused by independent day traders rather than institutional
traders. As we will study in depth later, traders buying stocks prior to
intraday breakout may be particularly sensitive to even the slightest drop
in price. A large pre-breakout volume indicates that there are multiple
“new hands” buying the stock. These new buyers, unlike the veterans
who bought the stock when it was much cheaper, are still in a dangerous
position. They have not yet profited and are therefore far more sensitive
than the veteran traders. If the stock should break out and correct even
slightly, there is a reasonable chance that the new buyers will flee quickly,
causing a temporary price drop. Usually these drops correct rapidly and
the stock resumes the upward trend. Experienced traders will even take
advantage of the temporary low to buy cheaply.

Buyers Fleeing Caterpillar, CAT

Looking at Caterpillar’s $88 breakout at the one-minute candle
resolution, we see Caterpillar’s buyer shakeout precisely at the breakout.
The price broke with a large volume of 600,000 shares in one minute (most
of whom are new buyers like me) and rose by 15 cents [1]. So far, so good.