Rule 3 - Buy on Volume

Today I wish to talk about price and volume. Note the graph courtesy of http://www.bigcharts.com/ of stock symbol PKG. Here we have a 3 month chart with volume bars along the bottom. You can see up volume in black when stock price is increasing and down volume in red when stock price is decreasing. Price and volume are the two most important parameters when studying a stock chart for a potential purchase. Volume is a measure of how much stock is being traded. The actual number doesn't really matter. The important thing is the relative measurement of volume compared to the day before. This stock has been under accumulation since start of December. Notice how price goes up on higher volume and falls back on lower volume. You can very clearly see the stock move up at the start of December, mid December and again in early January. Any pull backs are on much lower volume as you can see in late December. This tells us that someone is building a position in PKG and odds favor it will continue to rise (although this trend could change at any time). Just 3 days ago we had at least double average volume  as the price surged up. Now as it falls back again the volume is starting to decrease. Put yourself in the position of an insider that wants to accumulate a large position in the company because of some favorable event that may occur later. The trader wants to hold a large position but knows that if a large order is placed that will drive the stock up to prices that are no longer a bargain. The trader will buy a little stock and drive the price and volume up as he continues buying. The trader wants to buy more but the price is getting too high so he takes a back seat for a while. Joe public comes in seeing the big rise and starts selling to take their profit. Eventually the sellers will have exhausted and the stock goes quiet (small price changes) on low volume. The insider who wants to own lots of stock knows the price is unlikely to fall any more (sellers are exhausted) so starts his volume buying again. The tell take sign is that suddenly we see heavy buying again and the volume bar goes up as well as the price. This process continues until the insider has his allocation of stock or until he considers the stock is no longer at a price worth buying.

At some point we will see the inverse called distribution. The insider that accumulated this stock has decided to sell for some reason. He knows he can't dump it all because that will depress the price he gets for his stock. Instead you see a down bar on high volume like mid October then the insider will stop selling and hope the price recovers on low volume as Joe public starts buying it. When the insider sees the rise end in comes the heavy volume again as he considers selling much more stock until he is sold out.

The reason we look at price and volume is to determine whether a stock is under accumulation or distribution. Of course this can change at any time and that's why we protect our investments using rule 1  and 2. Rule 3 is buy on up volume, we wish to buy a stock that appears it is being accumulated. We like to see a quiet stock with little volume suddenly start moving to the upside on very heavy relative volume. This tells us someone has a reason to buy stock and we want to be following that insider. Most of the time stocks will just drift up and down along with the Dow Jones and meander with no direction. Those are not the stock to buy. Most of the time most stocks will meander but there are times when they are under accumulation or distribution and that's the time to take notice.

In summary only buy stocks that are under accumulation which can be noticed from stocks moving up on high volume and falling back on low volume. Every stock that falls back on low volume is another opportunity for you to buy more as the selling ends.