Learn How To Analyze Volume To Weigh Demand For A Stock

Stock

In "Ali Baba and the Forty Thieves" the titular hero struck it rich after saying the magic words "open sesame" to gain access to a cave full of treasure.

But volume was the key to name sake stock Alibaba generat ing riches of its own from a strong breakout earlier in 2020. Since passing a buy point in July, the stock has seen its price swell by more than 30%. The high volume up days, which are the hallmark of buying by institutional inves- fors, were major reasons for its price advances.

Volume, and its relationship with price, is one of the key con- considerations an investor should bear in mind when deciding when to buy a stock. For a price in- crease to be truly meaningful, it is vital that the stock is being bought in heavy volume, because This is an important indicator of institutional buying,

If the drop is coming in large vol- ume it could mean your stock pick is in danger of sinking as in- institutions throw their shares over- board. One can be more comfort able holding onto a stock if its price is falling in light volume.

IBD founder William J. O'Neil said developing the ability to ana- lyze volume is an essential . 

client to successful investing in his classic tome, "How to Make Money in Stocks."

He wrote, "Big volume at cer- tain key points is indispensable."

Referred to by many as the "Am- azon of China," e-commerce stock Alibaba has been a market leader of late. Investors were given a chance to hop on for the magic carpet ride after it formed a cup with handle base from late January until early July (1).

Distribution, or declines in high volume, was a key feature of the base-building process. This pro- cess reached its peak on May 22 (2), when it sold off in volume that was 166% higher than nor- mal on the company's earnings re- port. That seemed to be a good shakeout because the stock start- ed to recover from there.

There was still time for the stock to form a handle from June 24. A key characteristic here was below average selling (3), which suggested holders lacking convic- tion had been flushed out.

When Alibaba stock raced above its 231.13 buy point on July 6, it was a high-conviction move. Volume came in at 70% higher than normal and 48% above aver- age on a weekly basis (4). A nega- tive session the next day came in volume 17% lower than usual, which suggested the bears were ready to give up the fight.