Changes in the volume of a stock can tell you what to do — not just when you're looking at buying, but also when you're selling a good stock.
If you've been reading IBD a while, you know that big volume matters in many circumstances. A breakout past a proper buy point. A breakdown in the stock's strong uptrend. A break below the 50-day moving average. When you see turnover flying high, you're getting an immediate signal that institutions are moving stock big time.
Is there a sell signal triggered by thin trade? Definitely — and it's not just the emergence of new highs in low volume following a strong run by the stock. Be sensitive to low volume when a stock is trying to recover from a heavy sell-off.
Let's say a stock has fallen hard in strong turnover, but you've held onto it.
Perhaps the high-volume decline didn't actually trip one of IBD's sell rules, or maybe the stock clearly found support at its 10-week moving average during its slide.
Now, you want to pay attention when the stock rebounds. Check how volume looks with the rally, on both daily and weekly charts. Weak turnover, such as much lower trade than during the sell-off, tells you that you probably want to sell. You might also see poor price recovery.
William J. O'Neil, IBD's founder and chairman, wrote in his book "How to Make Money in Stocks," "Sell on the second or third day of a poor rally; it may be the last good chance to sell before trend lines and support areas are broken."
In 2007, former market leader Goldman Sachs (GS) provided a good example of a weak-volume rebound after a severe sell-off. The action came after the bank broke out of a cup with handle at 110.08 in August 2005 (see a longer weekly chart) and rallied 113% by June 2007.
The stock reached its all-time intraday high of 250.70 on Oct. 31, 2007. It ended up staging a negative reversal in the week that it peaked, turning a 6% gain for the week into a loss of 3% (1).
Volume was strong during that week, and then it kicked in even more during the next week, when Goldman lost 8% (2).
Still, you might have held onto the stock, since it finished in the vicinity of its 10-week moving average for the week ended Nov. 9, 2007. It closed just 2% below that key support level.
But then you got a sell signal during the next week. The stock rose 6.6%, but volume was much lighter than during the prior two weeks (3). There was a 4.7% rally in the week ended Nov. 30, but again volume was softer (4) than during the weeks ended Nov. 2 and Nov. 9.
Holders should have seized these precious opportunities to sell into weak rallies.
Are we seeing any examples today? Sure. Consider Goldcorp (GG).
Earlier this year, gold miners were red hot. So was this Vancouver-based miner of gold and silver. The stock rallied from a January low of 9.46 to as high as 20.24 just three months later.
The same action occurred on July 28, only this time the stock saw volume balloon to 20 million shares, 112% above average.
At that point, Goldcorp was trading below 18. It had triggered two sell rules already. A savvy investor would have bolted.
The next two weeks saw a few rebound attempts, but volume was weak. The stock rolled over in August and is now around 14.76, 23% below the 19.10 original pivot point.
(Editor's Note: This column originally published in the May 8, 2013, edition of IBD.)
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