Page 203 - THE MARKET WHISPERER

THE MARKET WHISPERER 19 9

In the chart above, notice Akamai’s strong day of highs shown in five-
minute candles. Notice also that the volume during the first trading minutes

and last trading minutes is higher because of automatic buy and sell orders

from individuals and institutional traders; therefore, these points have no
technical importance. In the area marked [1], the stock is trending up with
a (relatively) large volume. In the area marked [2], Akamai is dropping
with a small volume: this is a sure sign of lack of enthusiasm over the drop.
In area [3], it is running up again strongly with large volume. In area [4],
it trends down once more with small volume, and at [5], it peaks at a new
high with large volume. The conclusion is simple: more enthusiasm during

the upward moves than the downward moves indicates that the trend’s

chances of continued highs are greater than its chances of dropping.

What might have occurred had we seen the volumes grow during lows?

Would we have sold? Not immediately, but we would definitely have started

being “suspicious” about the trend’s continuation, and begun planning our

exit point should the reversal strengthen. Sometimes increased volume is

no more than coincidental “noise” that means nothing.

SMART A stock trending up needs to show increasing volume
MONEY when trading upward (indicating enthusiasm), and smaller
volume when trading downward. A down trending stock
needs to show the opposite.

How to Interpret Volume in a Downtrend

The behavior of a stock in a downtrend is slightly different from that of a
stock in an uptrend. It is more difficult to interpret the volume of a stock
when it is trending down compared to when trending up. Sometimes, when
the stock breaks support, the breakdown is not typified by large volume
since many investors tend to deny their failure and continue to believe in
the stock even though it is a losing trade. Amateurs tend to remain true
to a stock in much the same way as they stay true to a football team on
a losing streak. Have you ever seen a football fan leave his or her losing
team? Amateurs will always offer the same response: it’s good, it’ll come
back, it’s got good products, its management is good. Pros, on the other
hand, know when to cut their losses quickly. Amateurs will deny their own
failure, and are sometimes drawn into big losses that cause emotional
paralysis, preventing them from functioning logically. Paralysis and denial
may reduce volume of a stock during initial lows.

Another reason for low volume is the absence of demand. A losing