High Volume Retest

There are several variations of volume analysis at swings. The first one we ' ll cover here is High-Volume Retest, as shown in Figure 4.4. This chart shows hypothetical stock "EDF" as a previous high is retested.

As this example shows, the volume on the retest is 97 million—just 3 percent below the volume at the previous swing high of 100 million. The rule here is that if on the retest of a previous swing high volume declines by only 3 percent or less, it implies that upside energy is good and the market should continue its rally. In other words, volume that is very near or equal to the previous high (97 percent or more) indicates the presence of upside energy that is strong enough to push the market higher. The stock may pull back from a previous high a little before heading higher, but the condition remains bullish.

Reversals are expected on test of highs when volume is 92 percent or less than the volume at the previous high. Therefore, if volume is nearly equal (declining by only 3 percent or less) than the volume at the previous high, the market has energy to exceed the previous high. However, if volume shrinks down to 92 percent or less (a decline of 8 percent or more in volume) on the current test of the previous highs, then energy is not adequate to get through the highs and the market should reverse.

Figure 4.5 is a weekly chart of Eldorado Gold Corporation (EGO). During the first two weeks of November 2006, EGO tested previous highs

FIGURE 4.4 High-Volume Retest for Stock "EDF" Shows Good "Energy" to the Upside, with the Rally Likely to Continue

FIGURE 4.5 Weekly Chart of Eldorado Gold (EGO) Shows Higher Volume on Retests of Previous Highs, Indicating Stock Will Likely Rally, Which It Did after November Retest

Source: Chart courtesy of DecisionPoint.com.

FIGURE 4.5 Weekly Chart of Eldorado Gold (EGO) Shows Higher Volume on Retests of Previous Highs, Indicating Stock Will Likely Rally, Which It Did after November Retest

Source: Chart courtesy of DecisionPoint.com.

going back to May of that year. All the previous highs were tested on higher volume, which implied EGO had energy to pass through the old high and rally higher. As the chart shows, that is exactly what the stock did.

Now let's look at what happens when the High-Volume Retest occurs at a previous low. The same theory is at work here, but in the opposite direction. Figure 4.6 shows hypothetical stock GHI testing a previous low on near-equal volume of 97 million shares, compared with 100 million on the previous retest. In other words, the volume is 97 percent, or has declined by only 3 percent. This condition suggests that the stock has enough energy to pass through the previous low and continue lower.

Now let 's take a look at an actual example. Figure 4.7 is a daily chart of EGO, spotlighting the time frame of January through April 2005. Notice how the volume picks up at the previous lows, indicating the stock should continue to decline, which it does.

Stock G HI

Tested previous low on 3% less volume which implies decline should continue.

FIGURE 4.6 Chart of Hypothetical Stock GHI Shows Near- Equal Volume at Retest of Previous Low, Indicating Downtrend Should Continue

Tested previous low on 3% less volume which implies decline should continue.

FIGURE 4.6 Chart of Hypothetical Stock GHI Shows Near- Equal Volume at Retest of Previous Low, Indicating Downtrend Should Continue

Eldorado Gold Corp. (EGO) ameX_fc) 2007 DecisiDnPoirit.com

Eldorado Gold Corp. (EGO) ameX_fc) 2007 DecisiDnPoirit.com

Decs '13 2d 27 2005 10 18 24 Feb 7 14 22 Mar 7 14 -21 23 ft|)r 11 18 25

FIGURE 4.7 Daily Chart of Eldorado Gold (EGO) Shows Higher Volume on Retests of Previous Lows, Indicating the Downtrend Will Continue Source: Chart courtesy of DecisionPoint.com.

Decs '13 2d 27 2005 10 18 24 Feb 7 14 22 Mar 7 14 -21 23 ft|)r 11 18 25

FIGURE 4.7 Daily Chart of Eldorado Gold (EGO) Shows Higher Volume on Retests of Previous Lows, Indicating the Downtrend Will Continue Source: Chart courtesy of DecisionPoint.com.

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