Now I will have to admit when I started commenting on volume (here and here for instance) and its relationship to future performance, I was keeping the proceeding relationship in my back pocket. It is one of the easiest relationships to spot and trade. Essentially, it is volume off the high. When a stock is at or near a/the high price and subsequently sells off on heavy volume, the run is done. If see this setup and you own the stock, get out. If you cannot get out, protect yourself with options. If you want to trade the setup, go short, sells calls, or buys puts. It is almost without fail that a volume off the high setup will result in a significant decline in price.
What give me this confidence. Well, years of experience seeing this setup play out across investments, industries, and time periods. I have seen the volume off the high play out many times, I have traded on it, and I have made recommendation on it. I know it works.
With that in mind, I created a model using current companies in the S&P 500 and historically tracked the volume/price relationship for these 500 companies, looking for the following criteria. First, the stock price is within 5% of the 6-month high. Second, the stock trades down on heavy volume, which I defined as volume greater than 175% of the 6-month average. Last, I would log the performance of the shares after meeting the first two criteria, but I would put a stop loss level of 10% on any initial entry point. The results, graphically, are shown below.
The blue line in the above graph tracks the price of the S&P 500 while the red line tracks the short performance of a list of companies meeting the above criteria, both since mid 1999. Although these results do not represent any realizable portfolio performance (as I ignore some very real costs like general trading costs, liabilities related to dividends, or the ability to find shortable shares for instance). That said, I think the above graph exemplifies that volume can be a useful predictor of future price performance..... in certain instances.
What give me this confidence. Well, years of experience seeing this setup play out across investments, industries, and time periods. I have seen the volume off the high play out many times, I have traded on it, and I have made recommendation on it. I know it works.
With that in mind, I created a model using current companies in the S&P 500 and historically tracked the volume/price relationship for these 500 companies, looking for the following criteria. First, the stock price is within 5% of the 6-month high. Second, the stock trades down on heavy volume, which I defined as volume greater than 175% of the 6-month average. Last, I would log the performance of the shares after meeting the first two criteria, but I would put a stop loss level of 10% on any initial entry point. The results, graphically, are shown below.
The blue line in the above graph tracks the price of the S&P 500 while the red line tracks the short performance of a list of companies meeting the above criteria, both since mid 1999. Although these results do not represent any realizable portfolio performance (as I ignore some very real costs like general trading costs, liabilities related to dividends, or the ability to find shortable shares for instance). That said, I think the above graph exemplifies that volume can be a useful predictor of future price performance..... in certain instances.
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