I did not get a chance to post this chart 10 days ago. But I wanted to as the first entry into the before and after category. Before and after seems to be a decent way for me to look at any stock or index setup, make an observation on it or prediction, and then see if I was write or not. That is the purpose of this category, as a means to learn. Instead of just talking about a stock or position, it seems to be a good idea to revisit it and see how it played out.
As a special circumstance I am going to have to post both the before and the after chart in this one post. However, if you look at the first chart you will see based on the date associated with the price bars that I had made and recorded my initial observation on 2/11/2005. So what is the big deal with AIRT ? The big deal is that it shows a very good example of why it is so important to pay attention to volume analysis when you are watching stock prices.
If you do not use volume analysis in your trading, then in my opinion you are at a disadvantage compared to other traders. Volume analysis is indeed one of the secrets to long term successful trading in my humble opinion.
I noticed the AIRT stock chart after browsing some of the most actives during that day. Notice the three red arrows I drew pointing to three individual price bars on the upward advance in this stock chart. Then, take a look at the volume bars that correspond with each price bar.
This is more clearly seen in the second chart where I have labeled the three price swings ‘a’, ‘b’, and ‘c’ colored in blue. Notice that price swing A had volume of 5.6 million shares, price swing b had volume of 4.4 million shares. Ok, lets stop there for a second. That is a 21% decrease in volume and yet the price of the stock closed above the A swing. So what does this mean? Well for starters it means they were able to push the price higher on much less volume. They were able to close the price higher which is still a good achievement. However, the fact that volume dropped off 21% is a distinctive warning sign that the move was not real. It was ‘smoke and mirrors’.
It is possible for any stock to keep trending higher on less and less volume, but in terms of technical analysis, it depicts a supply/demand situation that is growing internally weaker over time. Always look for volume confirmation on stock movements and compare the volume expansion in terms of percent comparisons between previous swing highs or lows.
Point C on the chart was only 2 million shares and guess what else? Not only did point C test price swing b on a whopping 54% less volume. But it also proved the point by closing back under the close of B. At point C in the stock chart anyone who is thinking aggressively long is in big trouble… all the warning signs are there. This pattern may also be referred to as ‘Three drives to the top’ I believe as the veteran market guru Tim Ord calls it.
Anyway, point C was a bearish spring, and provided a clue that AIRT was likely to move back down to the gap, the last place where the real volume was (read demand). That is exactly what it did! A superb before and after example.
TC