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.

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