Can you tell if a stock is about to rebound?


Compare Price to Volume
A trader works on the floor of the New York Stock Exchange.
A trader works on the floor of the New York Stock Exchange.
© ANDREW BURTON/Reuters/Corbis

Share price is not the only indicator of the strength of a specific stock. When market analysts look for a stock with rebound potential, they pay particular attention to the relationship between stock price and trading volume.

First, let's define volume. Volume is a simple measurement of how many shares of stock changed hands during a single day of trading. It's important to note that each share has both a buyer and a seller. If a company's trading volume goes way up or down on a particular day, that's a good indication that investor interest in the stock is changing. If we throw stock price into the mix, we can start looking for signs of a rebound.

Here's how it works. If a stock's share price goes down, but trading volume is relatively low, that's called a weak move [source: Mitchell]. In other words, if volume is low, then investor interest is low, which isn't a strong indicator of a rebound. You need a lot of interested buyers to drive a stock price up; it's the law of supply and demand. The more demand for a stock, the more money investors are willing to pay for it.

If you are trying to predict a rebound, first you want to look for a sustained period of declining share price and a similar decline in volume. Then, just as trading volume tapers off, you want to look for a day — or an hour, or a minute! — in which the stock's share price still declines slightly, but there's a spike in trading volume. This is a sign that the last sellers are finally out of the market and buyers are now taking over [source: Mitchell]. If the buying trend continues, the stock price will rebound and you will have gotten in on the bottom floor.

Of course, you want to make sure the company itself is financially sound so that you don't end up with a bunch of worthless stock.

Stock analysts have developed a number of useful formulas for tracking this critical relationship between volume and share price. If you are serious about trading stocks, you should learn more about indicators like on-balance volume, Chaikin money flow and the Klinger volume oscillator.

Author's Note: Can you tell if a stock is about to rebound?

In its purest and somewhat sentimental form, an investment in the stock market is a vote of confidence for the future performance of a company or industry. If I buy shares of stock in General Motors, it means that I believe that GM will continue to innovate and outsell the competition. When the Dow Jones goes up, we generally equate that with growing confidence in the American economy. But how much does stock price and investment trends have to do with the actual financial performance of American businesses? And how much can be attributed to sophisticated traders using any number of mathematical algorithms and inscrutable techniques to "game" the system? If you want to take a somewhat disturbing look at the reality of modern stock trading, look up information about high-frequency trading or "robo-trading," which accounts for at least half of all the daily trading volume on the New York Stock Exchange.

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Sources

  • Abraham, Stephan. "3 Ways to Tell If Your Stock Has Bottomed." Investopedia. Dec. 17, 2010 (April 26, 2013) http://www.investopedia.com/articles/basics/10/3-ways-tell-stock-bottom.asp
  • Cox, Jeff. "Dow Breaks 14,000 Finally; What's Next for Market?" CNBC. Feb. 1, 2013 (April 26, 2013) http://www.cnbc.com/id/100416162
  • Cramer, Jim. "Cramer on Spotting a Stock's Bottom." CNBC. Feb. 14, 2013 (April 26, 2013) http://video.cnbc.com/gallery/?video=3000147989
  • Google Finance. "Dow Jones Industrial Average" https://www.google.com/finance?q=INDEXDJX:.DJI
  • Mitchell, Cory. "How to Use Volume to Improve Your Trading." Investopedia. May 16, 2011 (April 26, 2013) http://www.investopedia.com/articles/technical/02/010702.asp
  • Stark, Betsy. "Tracking the Dow One Year After Rock Bottom". ABC News. March 9, 2010. ((April 26, 2013) .http://abcnews.go.com/Business/year-ago-today-dow-hit-bottom-recession/story?id=10046578#.UYfgpsqzeSp
  • Twin, Alexandra. "For Dow, another 12-year low." CNN Money. March 9, 2009 (April 26, 2013) http://money.cnn.com/2009/03/09/markets/markets_newyork/

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