Use This Simple but Proven Indicator for Big Rewards

October 6, 2023

Where to start?

The other day, we ran into a fella who was looking to do some trading. He was proud that he had his investment accounts where he wanted them. He wasn’t looking for safe, long-term plays. Those were set.

He wanted to trade.

Knowing what we do for a living, he came to us looking for some pointers.

Longtime readers likely know where we directed him. We’ve long believed that trading volume is the most important indicator to look at when making a short-term investment decision.

Take a look at this image from our pals at Finviz. It shows the relative volume of every stock in the S&P 500. It’s a magical thing…

With just one glance, we can see where the market is putting its money.

With oil prices rising… the energy sector has been one of the hottest industries on Wall Street in recent weeks. Exxon Mobil‘s (XOM) relative volume – which is simply a measure of a stock’s current volume versus its long-term average – is at 1.22.

Any figure above 1.0 means the stock is hotter than normal.

That’s good.

There are several things we can do with this information…

Little Work, Big Rewards

First, we can look for momentum plays. A stock in motion tends to stay in motion. After pinpointing a stock that has strong volume, we can look for an underlying catalyst to determine whether the action is coming because of a one-time event (like an earnings pop) or something larger (like Exxon being the face of the rebounding energy sector).

A little homework here can lead to big rewards.

Volume often wanes just as quickly as it surges. An earnings report or some other headline-making news can send volume jumping… temporarily.

Identifying the stocks seeing these kinds of short-term bumps and playing their downside can be quite lucrative.

For the technically savvy, this technique can be used to spot price reversals. When a stock that has been falling suddenly sees a surge in buying pressure, it’s a good sign that the bottom is in and a rebound is on the way.

Finally, relative volume helps us understand the market’s sentiment toward a stock. A highflier that’s seen a large surge in volume may begin a manic sprint higher. If it does, that sprint likely won’t last. But a stock that sees moderately rising volume and has its price trend upward along with that volume is likely to keep rising.

A relative volume of about 1.5 to 2.0 tends to be the sweet spot for fast, reliable action.

If you’re looking for a speculative but potentially lucrative play, find a stock with high short interest. As buying volume jumps higher, the folks betting against the stock will be forced to add to the pressure.

It’s a recipe for a big boom.

But no matter what…

If volume isn’t part of your investing strategy… you’re doing it wrong.

Volume is one of the simplest – yet most effective – indicators we’ve got.

Be well,

Andy

P.S. Did you catch our big event with Robert Ross yesterday? More than 100,000 folks signed up to discover the little-known force behind companies that could be on the cusp of returning 10,000% in as little as five years. It’s not something you’ll hear about from Wall Street money managers… but Robert laid it all out for attendees. The event was so popular… our servers crashed! Watch the free replay here.