Volume is the Key

I don’t know if it’s an asset class, but I’ve been studying volume and volume changes (or volatility) for more than a year now. After watching the plays in volume, I would like to tell you some information I’ve discovered, and conclusions I’ve reached. You might want to use this information, or not.

1. Big boys play in one day, and in as short a time as possible in that day. The good ones use their HFTs or hire HFTs to observe and gauge the volumes at or near the point they wish to make a trade. The bad ones just make the trade through brokers. So on the charts below, I will show you where a huge trade moves the market, and where a huge trade does not. The reason they make the play as fast as possible is because observers and small traders see huge volume spikes, and either short or long and enjoy the ride on the big play. These small traders also cause the market to move, costing the big trader more money.

2. Big boys hate to make trades, because of the cost of making the trade. Remember, we get to remove the cost of our trade when we calculate the profit/loss. But the big boys don’t. Their costs include the brokers’ fees, as well as the stock price move during the trade, both of which directly affect their bottom line. So they hate to be wrong. When they’re wrong, you will often see them appear on Bloomberg or Money, in order to play their agenda and move their position, probably so they can get out. Usually not so they can get in, because that would be a warning and traders would listen. I saw one come on Betty Liu’s show, and she ripped him a new one. I was proud of her. (As an aside, the next day and for the following week, she was missing with no “I’ll be out and xxx is taking my place” announcement, so she could have gotten a week off to think about it, or it could have been a vacation. I’d love to know which.)

3. Big boys are more often right than wrong. When stocks that are at a high, with high stochastics and outperforming the market % gain show a big volume sell, most of the time the stock goes significantly down in price over the next quarter. Conversely, when the stock is at a low, with low stochastics and underperforming the market show a big volume buy, the stock goes significantly up in price over the next quarter.

4. Often, before a big buy or big sell, there is stock volume movement. Now, I’m not one to insinuate there might be insider trading, but you have to wonder why these larger-than-ordinary volumes appear just days or even hours before the large volume trade is made.

5. After a big buy or sell moves the market, there are often after-shocks where the price continues to move. It moves Fibonacci-like and can continue in the direction caused by the big trade, or can move in the opposite direction, as a recovery. I’m not sure why, but it may be because traders or bots consider things other than volume, and just continue and follow the money. In any case, putting market orders above and below the big move’s pricepoint will often catch the direction and this play can make some money. You simply cancel the market order which isn’t executed.

6. During earnings season, you will observe increased volatility. I am now studying the volume action for 5 days prior to the reporting. Again, looking for unusual volume action, under the supposition that there may be , um, some advanced warning given to some, um, special individuals, who, might, um, possibly, trade on that information, in possibly some significant volumes? Naw. Couldn’t ever happen. Could it.

Now, the charts. Yes, Rock’s giving you charts again. Sorry.

First, here's a big price move as we would expect with a big volume buy:



Now, here's a small price change, but again, huge volume:



Here's an aftershock where the stocs were low, but the stock had done a big move upwards. The Sell happened, and the aftershock continued:



And finally, here is an example of, um, maybe advanced warning there's gonna be a big buy. Note the volume increase 6 days before the big buy.