One thing I have always found interesting is how stock selection services will tell you
which stocks to buy, but never really teach you how to determine
which stocks to avoid. This knowledge, as you can imagine, is just as important - if not more - than knowing what to buy.
Yesterday's lower market move actually found me sitting out, even though several stocks came up on my screener. I sat on the sidelines. Why?
Well, I
do like it when the market is moving, and it was. If you think of it this way - if you're looking to get somewhere, it's better to jump into a moving stream than a still pond to get you there. Yesterday was a moving stream.
The only problem was - the stream was pretty shallow. Although the S&P closed down about 1%, volume across most markets - and every breakout stock that came up on my screener, was low (less than the 5-period SMA as I define it).
You can see a typical low-volume reaction in Monster Worldwide's (MWW) activity yesterday, shown in the chart below. A signal fired at 10:22 that a bearish engulfing pattern had emerged - meaning the bar had opened above the close of the last bar - gapped up, and closed below the low of the previous bar). This is a very strong signal.
Confirming this was a pretty high stochastic value of 71.34, meaning the stock was somewhat overbought. This means the engulfing pattern could likely be a reversal of the upward trend.
We also saw the stock's price punch through its 8-period SMA, showing there might be some signs of quick movement.
With all of this information and these confirmations, the stock didn't go anywhere. Why?
The answer: low volume.
You can see from the chart that the volume had been rising into the close of the previous day, and spiked on the last bar of the day. What happened on this reversal bar? The volume retreated below the 5-period average, which showed me there wasn't much conviction to this move. And the stock moved pretty much sideways for the remainder of the day - not a winner, not a loser - but no reason to put capital at risk for something like this.
