POWER SPIKE
Uncover great swing trades using a simple market scan that searches for high-volume events. These "power spikes" often take place at the cusp of major breakouts or breakdowns, but they can appear anywhere on the price chart. Let's see how this scan can fill your watch list with the hottest and coldest stocks in the market.
Routine order flow masks the true nature of accumulation and distribution, but high volume rings a very loud bell from time to time. These power spikes represent influential events that leave their footprints on the underlying trend for weeks to come. But high volume won't trigger an entry signal all by itself, so you need to stalk your prey until it does.
Understand the real purpose of market scanning. Traders spend long hours trying to build scans that spit out perfect gems and no losers. This obsession actually undermines their considerable efforts. Scans are wake-up calls for your watch list, nothing more and nothing less. They uncover market patterns that need to mature before you take action. In fact, good scans will increase the trader's workload, not decrease it.
READ THE VOLUME
The power spike searches the market using two calculations that track the relationship of recent volume to an intermediate moving average of volume. The first scan element flags a stock when daily volume equals or exceeds three times the 50-day moving average of volume.
V >= 3*[MA (V,50)]
But significant activity can also stretch across a series of days. Each individual bar may not qualify as a power spike, but the end result remains the same. In the second scan element, daily volume must equal or exceed two times the 50-day moving average of volume for two days in a row.
V >= 2*[MA(V,50)] AND V[-1] >= 2*[MA(V,50)]
Take the output and categorize the stocks by the patterns in which the volume appears. These generally fall along the lines of breakouts, breakdowns, climaxes and silent alarms. Most power spikes don't show good patterns and should be discarded immediately. The most effective work flow takes the most promising stocks and puts them on a watch list where they can be reviewed on a daily basis.
Price surging through support or resistance on power-spike volume confirms that the breakout or breakdown is real and should be sustained. But entering a position right after the spike is a bad idea, because those profiting from it are already looking for an exit. So wait for a pullback or congestion pattern that gives you a lower-risk entry.
Power spikes that follow long trends flag exhaustion moves and significant reversals. Look for confirmation through relative strength indicators that push into overbought or oversold territory and quickly reverse. These climax spikes can print highs or lows that persist for months. They also provide good exit signals for traders who are already positioned in the direction of the prior trend.
Drop down to a lower time frame chart when you see a climax spike, and see what type of reversal is getting set up. You'll often find a small double bottom or top that gives you a reference point for entering a low-risk position. Other times this close-up view will reveal ledges or triangles you can use to place your stop loss after entry.
SILENT ALARMS
Market hotspots trigger silent alarm spikes -- high-volume events that take place within narrow congestion. These events reflect intense crossroads of buying and selling pressure, where volume swells but price sits still because of a standoff between bulls and bears. The best trades come when high volume prints at the same price level it did in past retracements. This suggests a zone where big players are making big commitments.
Silent alarms taking place within narrow range bars promote a very simple trading strategy. Stand aside when you see the event, but take a position in whatever direction price moves out of that bar's range. The market should break out or break down very quickly after thrusting away from the silent alarm bar.
Watch out for preplanned activity that negates the power spike output. A high-volume event may not arise from an emotional crowd at all. A company could be issuing a secondary stock offering of many millions of shares, or a significant investment by a single holder could be scheduled to execute on that date.
Source:www.hardrightedge.com
