Bar charts are a bit of a technical subject. Although this does come under the heading of technical analysis (no pun intended), we’ll try to keep it simple. If you learn how to use it well, you’ll be that much more at cause over emotional news, analyst recommendations, etc.
When we say bar charts, we mean the “price and volume” of a stock’s chart. A stock’s price displayed on a chart with the volume for that day, week, etc. Like this:
The vertical bars represent the high and low of the price for that day, week, etc. The horizontal slash represents where the price ended at for the day, week. Etc. But you already knew that, right?
The volume bars at the bottom of the picture represent the total amount of shares traded for that day, week, etc.
Both the price and volume have moving averages that look like this:
These lines give you an idea of what the average price (or volume) of a stock is relative to the last 10 days, 50 days, 200 days (or weeks), etc.
Here are the basics of how to interpret these two pieces of data on bar charts; both volume and price:
When price goes up and volume goes up, it indicates strong buying demand.
Volume is a footprint left behind by the institutional investor. After all, it takes millions of dollars to move tens of thousands of shares to increase the volume and price of a stock.
Notice how the volume of the huge up day in this graph looks like it’s more than double the average volume. That’s institutional buying power at work!
When price goes up and volume is average or below average, it points to mild, tepid buying.
There is some buying taking place, but the institutional investors aren’t rushing in to buy the stock. If they were, they would leave their volume footprints.
Likewise, when price does down and volume is average or below average, it indicates mild, tepid selling:
On the other hand, when you see the price go down with heavy volume, watch out!
The institutional investors are hitting the exits, and hitting them fast.
As discussed in Stock Breakouts, volume also plays a key role in breakouts. When a stock’s price is breaking into new high grounds coming out of a sound area of price consolidation, you want to see massive volume. The bigger, the better.
Come on, you know this one. Right! The institutional investors!
When you see daily or weekly volume 354% above-average on a bar chart, someone managing lots of money is very interested in that stock.
In addition to these tidbits, look to see “tight” price areas. Like this:
When we say tight price areas, we mean small price variations from high to low on a daily or weekly bar chart. The price bars look shorter than the usual daily or weekly bar. This tightness points to quiet accumulation by institutional investors. Wide and loose price areas point to erratic buying and selling, and isn’t the best indicator in the world. Like this:
Have you ever played a game of Spoons? It’s a card game where you sit around a table passing cards to the next person, in a circle. There’s a set of spoons in the middle of the table. There is one less spoons than there are players, so that one player will be left spoon-less at the end of the game.
As soon as someone gets four of a kind, he or she grabs a spoon. Once he/she snags that spoon, all hell breaks loose as the other players scramble and scratch their way to spoon-ownership.
We’re going off on this “Spoons” tangent (aside from the fact that we’re avid Spoons players) because it can be compared to tight and loose price areas on bar charts.
A tight price area is like the calm and collected Spoons strategy. Once you have four of a kind, you silently take one of the spoons while no one notices. That’s what the institutional investors are doing. Silently collecting up shares when no one notices.
A wide, loose price area on a bar chart is like the feverish scramble of all of the players after you slam your first on the pile of Spoons and yell at the top of your lungs “I’VE GOT A SPOON!” When the whole market is aware of the stock, emotional buying and selling enters in, which forms wide and loose patterns.
So there you go- you now know more about price and volume action- AND Spoons!
As mentioned in Stock Bases, you want to see a dry-up in volume in the lows of a base. This means that most, or all of the selling has taken place and is now exhausted.
As you can see in this picture, most of the volume in the tight price area is below average. When the stock breaks out the area of price consolidation, the volume kicks in.
Monitoring price and volume action is a good hedge against emotional news and market analysts. It gives you a factual picture of what is happening with the stock. Use it to your advantage! Your portfolio will thank you.
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