Ord Volume Sell Signals

Before we go further let's review the sell signal set for the Ord-Volume method from Chapter 3:

A sell signal is triggered when a stock hits a minor new high and the Ord-Volume on the current up leg shrinks by approximately

FIGURE 5.3 Ord-Volume Chart for Questar Corporation (STR) Shows Buy Signal Generated after Mid-March Low, but Volume on the Next Up Leg Is Not Ideal

50 percent or greater compared with the Ord-Volume of the previous up leg or down leg; the stock then closes below the previous high. Both conditions determine the stock is in a weak position. This triggers the sell signal. Confirmation of a top is produced when Ord-Volume increases by 50 percent or more on the down leg after the top compared to the up leg going into the top.

Figure 5.4 shows a sell signal triggered in JP Morgan Chase (JPM) in February 2007 (as seen in Figure 4.21 in Chapter 4). The selling signal trading pattern was called "False Breakout Top." In general, the False Breakout Top was a lighter-volume break above the late January 2007 highs. A close below the late January 2007 high triggered the sell signal.

Now let's compare that sell signal to Ord-Volume signal generated in the same time frame, using Figure 5.5- which shows the stock in Ord-Volume format. A lot of information can be derived from this chart view in Ord-Volume format. To start, let "s compare the rally legs on JPM from the January 2007 low as it progressed into the high of mid-February 2007 and then the down leg thereafter.

FIGURE 5.4 False Breakout Top Pattern Generated a Sell Signal in J P Morgan Chase (JPM)

Source: Chart courtesy of DecisionPoint.com.

FIGURE 5.4 False Breakout Top Pattern Generated a Sell Signal in J P Morgan Chase (JPM)

Source: Chart courtesy of DecisionPoint.com.

The rally leg into the $50.68 high had Ord-Volume of 14 million compared to the previous up leg of 11 million, which showed that upside energy was increasing, the tone was bullish, and the rally should continue. The next rally leg into the $51.33 had Ord-Volume of 14 million, which was also a good comparison. It showed energy was steady, although not increasing compared to the previous up leg to $50.68; still, it was bullish and implied the rally should continue. When JPM rallied to $51.95, however, Ord-Volume shrank to 9.9 million, which was 30 percent less than the previous up leg and showed that energy had decreased by nearly a third. This was a bearish sign.

In the Ord-Volume definition of a sell signal, we like to see a 50 percent decrease in Ord-Volume in the rally leg into the top compared to the previous up leg or down leg. A 50 percent decrease in Ord-Volume on the final leg up compared to the previous up leg or down leg is a stronger sell setup than a stock that has a 30 percent decrease in Ord-Volume on

En-™ ¡« „„„h Ord-volume shrinks 40% compared nit Sell sictnal

En-™ ¡« „„„h Ord-volume shrinks 40% compared nit Sell sictnal

stronger as Ord- erergyhaS Volume increased switched to from previous up leg. dowr,s!de m

FIGURE 5.5 Ord-Volume Chart Format Shows Detail of Volume Comparisons at Key Price Points in JP Morgan Chase (JPM)

stronger as Ord- erergyhaS Volume increased switched to from previous up leg. dowr,s!de m

FIGURE 5.5 Ord-Volume Chart Format Shows Detail of Volume Comparisons at Key Price Points in JP Morgan Chase (JPM)

the final leg into the top. Therefore, if a trader had a choice between two stocks to sell short—one with a 50 percent shrinkage and the other a 30 percent shrinkage in Ord-Volume compared to the previous up leg or down leg—the trader would take the one with the stronger sell signal and the greater decline (50 percent) in Ord-Volume.

Going back to our example of JPM, notice that on the down leg from the $51.95 high that Ord-Volume increased by 40 percent to 14.0 million compared to the previous up leg (9.9 million), which showed that energy had switched from the upside to the downside. This confirmed the bearish signal.

Although we like to see a 50 percent increase in Ord-Volume on the down leg after the sell signal compared to the previous up leg, and a 40 percent increase in down leg volume was not as strong a confirmation as we would have liked, the trade did work fine. In situations such as these, it's up to traders to define their degree of safety in trading signals. Using the Ord-Volume format, a trader can judge the degree of safety. I have found that a 50 percent shrinkage in Ord-Volume at the final highs or lows works well for us. Keep in mind that all signals are to be taken in the direction of the overall market, and traders should pick stocks in the best sectors. (Market direction trend signals and sector trend signals will be covered in Chapters 6 and 7.)

UNDERSTANDING VOLUME PUSHING PRICE AND TIME FRAMES

In this section, we will discuss two important concepts. The first is how volume pushes price; it is the fuel that moves an issue upward or downward. Therefore, volume, not price, is the most important factor. The second is to look at a stock in a larger time frame in order to comprehend its "bigger picture," before analyzing the buy and sell trade setups that appear in the shorter time frames.

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