Page 306 - THE MARKET WHISPERER

302 PART 10 - Winning Trades

Pre-Breakout Volume

Would you want to see an increase in trading volume prior to breakout?

I imagine your answer would naturally be “yes,” that increased volume

indicates strong interest, and strong interest prior to breakout would lead

to a stronger breakout, right?
In fact, this isn’t necessarily true. Once on the verge of breakout, the

price has already taken the long journey up to this point. The price has

risen, is resting, and we await the next leg of its journey.

SMART Large volume prior to a breakout is not a good sign, since it
MONEY indicates a change of ownership. Nervous buyers, who may
flee at the first sign of weakness, take the place of veteran,
relaxed shareholders.

When you watch a stock’s chart, try to decipher the state of buyers and

sellers. Try to imagine who they are, what they are thinking, and what you

would do in their place. Let us analyze the situation: veteran investors are

the ones who bought the stock a long time before it reached its current

breakout point, and can therefore be defined as “the strong hands” of

the game. They profit nicely and are not sensitive to slight fluctuations
in price. By contrast, new buyers, who bought around the consolidation
point prior to the breakout or immediately following the breakout, are

the “weak hands” since they have not yet earned a cent. They are highly

sensitive to every loss, and any small change in price may pressure them

to exit, contributing to a failed breakout.
Large volume during consolidation and pre-breakout means multiple

buyers and sellers and a lot of shares changing hands. We need to assume

that veteran investors are realizing profits, whereas nouveau buyers are

the “weak hands.” The conclusion is simple: when large amounts of shares

change hands, ownership moves from strong holders to new, weak holders

who will likely panic at the slightest fail.
Compare the situation to a residential neighborhood where you live.

Let’s assume a large number of real estate transactions occur there. A lot

of homes are changing hands. In a few years’ time, will it remain the same
neighborhood you know so well? Of course not. The populationchanges,
and the nature of the neighborhood with it. The same happens to the

stock you are buying. Large volume prior to breakout means a change of

ownership. That, in turn, means changed behavior of the stock. The change

may cause higher sensitivity or jitteriness, and even a failed breakout.