An Indicator That Speaks Volumes

One way to stay on top of market trends would be to dump stocks that are ready to dive and pick up on those that are ready to soar. This would be a real "no brainer!" The question that naturally follows is this one: Is there an easy way to do that? The answer: You bet there is and here's how:

You can determine the strength of a trend by using one of the simplest indicators out there: volume. Volume is simply the number of shares traded during a given time period - be it hourly, daily, weekly, or monthly. But just because volume is easy to read doesn't mean it isn't important.

When, for example, a stock starts moving higher - and the move is accompanied by high volume - that indicates the stock is in a strong uptrend. Conversely, if it starts moving lower - accompanied by high volume - that indicates the stock is in a strong downtrend.

Spikes in volume are often signs of unanimous thinking. If a volume spike occurs at the top of an uptrend, it often means a bullish consensus has been reached, leaving few buyers on the sidelines and room for a downward move. On the downside, a volume spike marks a capitulation point where investors have thrown in the towel. In that case, selling pressure could reach a point where there are few sellers left, leaving room for an upside move in the stock.

Almost all financial websites that have stock quotes also have a volume scan function. As you analyze a stock, watch the volume to see if it confirms your opinion of what lies ahead for the stock. You can also scan for stocks that are experiencing volume spikes - on the upside or the downside - potentially finding those that are on the verge of a reversal.

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