The above is a typical characteristic of a healthy uptrend, it is because during a consolidation, sellers are not selling aggressively, thus volume is usually lower. When price rally again, volume increase substantially because of strong buying interest, therefore, a good chance for the uptrend to continue.
Chart 1: Ranhill [5030] chart from 16/01/09 - 15/05/09.
As shown on chart 1, price of Ranhill formed an uptrend in March, 2009, forming several higher-lows, as shown by the T1 uptrend line. During the uptrend at T1, whenever price rally, volume increased substantially, and during its correction, volume declined. As shown by the arrow on chart 1, volume is gradually increasing in its uptrend, this is usually a typical uptrend volume pattern, and the uptrend is expected to continue until the price should break below 14, 21, 31 EMA of the T1 line.
Chart 2: Pelikan [5231] chart from 16/01/09 - 15/05/09.
Chart 2 is another uptrend example, with volume gradually increasing, Pelikan. T1 is the uptrend line for Pelikan while when price rally, volume increased but when when price correct, volume declined. This shows that during a correction, selling pressure was not too strong, thus a chance for the price to continue its uptrend, unless price should break below the T1 uptrend line.
Volume Hike:
Volume Hike is an important warning signal in technical analysis. By definition, when volume increased more than 300%, it is a volume hike, and generally, it is not normal. However, there are no signs or symptoms before any volume hike.
If price should stop rising, or starts falling, or even form a long upper shadow candlestick while volume hike, it is a warning signal, suggesting that the price is near a strong resistance level or strong selling pressure.
When volume increased significantly, it means that the numbers of shares 'changing hands' are increasing. Therefore, more buyers and more sellers. However, if price should stop rising, that means the sellers are not selling their shares at a higher price or the buyers are actually buying at lower price.
If price should fall during a volume hike, it means that the sellers are selling their shares to buyers without asking any premiums, which in turn, implying that the sellers are more aggressive than the buyers, thus a stronger selling pressure at the particular trading day. In this case, chances for the price to continue its rally is usually lower.
Price rally of volume is usually very short-term, and some short term speculators might find this attractive. However, these types of stock price movement is very risky, and not suitable for conservative, long-term type of investors.
Typical Volume Hike Examples:
Chart 3: Pohkong [5080] chart from 16/01/09 to 15/05/09.
As shown on chart 3, price of Pohkong increased 21.3% on the 4th of May, 2009, with volume increasing 1344.7%, which formed a volume hike warning. Immediately on the next day, profit taking took place and price started to retreat, however, volume increased 6657.2%, which is another volume hike warning. This suggests that the selling pressure was very strong, thus the rally is less likely to sustain. Although price did not fall significantly after the volume hike incident, it is important to note that it is less like to form a healthy uptrend.
Chart 4: Compugt [5037] chart from 16/01/09 - 15/05/09.
As circled at A, price increased 17.5%, but only managed to close at RM 0.15 after forming a candlestick with a long upper shadow. This suggests that the selling pressure on that day was very high, which is a warning signal. Meanwhile, as indicated by B, volume increased 1422.1%, with price forming a long upper shadow line, this shows that the strong selling pressure is not easily absorbed. Price continue to move lower and even breaking below the 14, 21, 31 EMA support afterwards, with high volume, as indicated by C, suggesting the strong selling pressure continues.
Conclusion:
Volume gradually increase during an uptrend is a typical healthy signal, it is an important signal which technical analysts pay attention to. During a healthy uptrend, price trend and volume would form a regular behavior, and by understanding or familiarizing its behavior, stocks with these uptrend behavior would be the best choice of investors who understand technical analysis. In contrast, for those stock movement with volume hike, their behavior is usually abrupt, or in other words, hard to study, and therefore, not suitable for most investors, especially not suitable for long term nor conservative type of investors. To sum up, with proper and careful analysis, investors should avoid these types of stocks, to avoid unnecessary trading risk.
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