Rule 4 - Buy when Quiet

Yesterday we discussed how to identify a stock for purchase using price and volume. Today we need to choose the exact buy point of that stock. When you see a stock breakout on high volume from a recent consolidation you have identified a stock of interest. Even if there is no news somebody knows something or we wouldn’t see significant buying volume and a rising stock price. The temptation is to buy it immediately but unfortunately that’s the wrong thing to do. Every big stock price jump is susceptible to profit taking after a good rise. In fact it is very common fall a stock to fall back to its “pivot point” after an initial high volume break out. The pivot point is the point at which the break out started, it would be the top of the recent resistance area or consolidation. Don’t buy a breakout on volume only to see it fall back and you get stopped out with a 10% loss. Every rise will be greeted by profit taking at some point because of nervous stock holders wanting to bag that profit. The time to buy is after the stock has broken out on volume and then you see the pull back on very low volume. If the stock is truly a good buy there should be very little selling. You would see the stock grudgingly fall back then go horizontal for a while. That’s a “quiet” stock and that’s the time to buy when all sellers are exhausted. We don’t want a stock that breaks out on volume to the upside then falls back down on high volume. That suggest you have serious selling and the stock may not be a good buy.


Take a look at the graph below courtesy of www.bigcharts.com for stock symbol TSTC.

This stock has climbed relentlessly on high volume regularly only to fall back each time on low volume. Note the high volume spikes as it jumps up out of each consolidation (quiet area) at mid October, mid November, begin December, early to mid December, late December and again early Jan. Before each of these jumps we have a “quiet” period where you can add stock to your initial holding. The stock has gone quiet and is consolidating on very low volume. All the sellers have been exhausted and “maybe” the buyers are waiting to jump in again thinking they can’t get it any cheaper. One interesting point here is the last couple of trading days has shown some high volume spikes on falling price. This is not yet a sign of trouble but should be watched closely. The $19 level which is the base of the last trough where the last selling ended will act as support. If it falls below that support especially if it falls on volume then that is the time to start taking some profits. You would sell some and sell even more if it continues to fall on volume. If upside movement returns on volume then you can start adding again.