It's one thing to identify a base on a stock chart. Identifying its good and bad parts is another. That's a process in stock analysis that requires studying each week in the pattern.
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"You want to judge how much price progress up or down the stock made during each week and whether it was on increased ordecreased volume from the prior week," IBD founder William O'Neil wrote in "How to Make Money in Stocks."
Generally, you want to see up weeks in higher volume and down weeks in lower trade. Alsolook for churn, or heavy volume with little change in stock price. This type of action can signal a change in direction for stocks, either up or down. It tells you momentum is halting.
On weekly charts, look for weeks with above-average or sharply higher volume than in the previous week. In the same week, watch for price declines that are much smaller than in the previous few weeks. In other words, the price decline slows even as trading remains heavy.
This stock analysis signal is stronger when the stock closes high in its weekly price range and the price range itself is wider than usual.
To be sure, churn is found in relatively few bases. Among the few examples was Franco-Nevada (FNV), the mining royalties company.
Stock Analysis Of Mining Stock
The stock formed a shallow cup-with-handle base in March through May of 2019.
The week ended May 3, 2019, saw volume jump well above average and 70% above prior weeks' turnover (1), yet the stock dropped a mild 0.4% that week.
This was positive churn. IBD's O'Neil had a special term for it: heavy volume without further price deterioration. Franco-Nevada had fallen 1.3%, 4.7% and 0.2% the prior three weeks, so downward momentum was definitely slowing. The base bottomed during these three weeks.
With the firm bottoming in place,Franco-Nevada broke out past a 76.90 buy point in heavy volume onMay 31, 2019.The base was so shallow, it might also have been interpreted as a flat base. Shares surged 31% until the next base started forming in early September.
The flip side of bullish churn is heavy volume without further price progress. You'll see volume spike while the stock struggles to maintain upward momentum. Shares often will close low in the weekly price range. Treat this as a red flag, if not a sell signal.
A form of this characteristic is stalling in the major indexes, and it is found in daily rather than weekly charts. Stalling, a type of market distribution, happens when an index makes a small price gain in higher turnover but closes in the lower half of the day's price range.
This article was originally published June 26, 2020 and has been updated. Juan Carlos Arancibia is the Markets Editor of IBD and oversees our market coverage. Follow him at @IBD_jarancibia
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FAQs
Generally, you want to see up weeks in higher volume and down weeks in lower trade. Also look for churn, or heavy volume with little change in stock price. This type of action can signal a change in direction for stocks, either up or down. It tells you momentum is halting.
How do you predict stock price using volume? ›
Trading volume is one of the metrics that traders watch to predict the momentum of a stock or other security. An increasing trading volume might be a sign of favorable sentiment, indicating a likely price increase. A falling trading volume might indicate that the market is losing interest.
How to spot momentum stocks? ›
A high OPScore suggests a strong momentum, while a low OPScore implies weak momentum. RSI (Relative Strength Index) indicates the strength of the stock's recent price movements relative to its historical performance. An RSI below 20 signals an oversold condition, indicating potential buying opportunities.
How do you calculate momentum in stock price? ›
How do I calculate momentum? It's simple: divide the stock's current price by its price from 6 or 12 months ago.
How do you predict momentum in stocks? ›
Elements of Momentum trading
Traders look out assets with substantial trading volumes, which frequently indicate the strength of the trend. Moving averages, RSI, and MACD are important technical indicators for gauging momentum and determining exact entry and exit locations.
How to read the obv indicator? ›
How to interpret on balance volume? Experts recommend interpreting the OBV changes together with the price chart moves. If the OBV value is rising along with the price, the trend should continue. If the OBV value goes down while the price goes up (divergence), the trend should reverse.
What is the best indicator of stock momentum? ›
The most popular momentum indicators vary among traders, but names like the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) are among the most famous due to their effectiveness in identifying trend strength and potential reversal points.
What is the momentum indicator strategy? ›
The momentum indicator works by calculating the difference between the current price and a specified past price, and then plotting that value on a chart. The indicator is typically displayed as a line that oscillates above and below a centerline.
What is momentum stock picking strategy? ›
Momentum investing is a trading strategy in which investors buy rising securities and sell them when they look like they've peaked. The goal is to work with volatility by finding buying opportunities in short-term uptrends and then selling when the securities start to lose momentum.
What is the momentum 14 indicator? ›
Momentum indicators measure the rate of change in price but have three basic weaknesses: Momentum tends to be erratic. Most momentum indicators suffer from base effects. Unusually high or low prices at the start of the indicator window (e.g. 14 days ago on a 14 day indicator) cause distortion.
The product of the units of mass and velocity is the unit of Momentum. To find the momentum, we can use the simple formula: P=mv, where P is the momentum.
What is the absolute momentum indicator? ›
The Absolute Momentum Indicator displays the rolling 12-month performance (measured over 250 trading days) and plots it against a horizontal line representing 0%. If the indicator crosses above this line, it signifies positive absolute momentum, and conversely, crossing below indicates negative momentum.
What is the indicator to check the momentum of a stock? ›
Momentum measures the rate of the rise or fall of stock prices. Common momentum indicators include the relative strength index (RSI) and moving average convergence divergence (MACD).
How do you capture momentum in the stock market? ›
Momentum trading involves entering a stock position as its price begins to ascend and exiting as soon as it starts to decline. This strategy is based on the observation that stock prices often do not reflect their true value for prolonged periods, and they tend to move in a single direction for extended durations.
What is the best momentum strategy? ›
Successful momentum trading involves identifying strong price momentum, selecting appropriate technical indicators for market analysis, such as the RSI and MACD, and setting trade parameters including strategic entry and exit points, stop losses, and position sizes relative to a trader's risk tolerance.
How do you predict stock prices? ›
A popular method for modeling and predicting the stock market is technical analysis, which is a method based on historical data from the market, primarily price and volume. Quantity.
How do you calculate volume forecast? ›
The extreme points method
This method consists in determining the equation of the line of type y = ax + b, where: y is the sales volume (or turnover); x is the year sought for the forecast; a and b are parameters independent of x, with a the directing coefficient of the line and b a constant.
Does volume correlate with stock price? ›
Key Takeaways
Volume is an important indicator in technical analysis because it measures the relative significance of a market move. The higher the volume during a price move, the more significant the move; the lower the volume during a price move, the less significant the move.
How to trade based on volume? ›
An uptrend with an increase in volume followed by a pullback with lesser volume confirms a bullish trend. Likewise, a downtrend with an increase in volume and a pullback with lesser volume confirms a bearish trend.
