Big Volume Decliners Breaking Support

By Cory Mitchell | Updated September 02, 2014 AAA

These four stocks broke through support on May 6, with volume that is more than double the average. The strong selling through a key zone typically indicates more downside to come. Strong volume is one thing, but a very large volume spike could actually mean a reversal in the opposite direction. Three of these stocks saw strong selling, one saw massive selling. Looking at the overall price picture, as well as volume, provides evidence as to which direction these stocks are likely to go next.

First Energy (NYSE:FE) broke below support at $33 on more than double the average volume, indicating a further slide. The long-term trend for the stock is down, so the sell signal  indicates another wave lower is coming. The price is likely to find some support near $31, but given the long-term downtrend isn't a buying opportunity. Only if the price stays above the February low at $30.10 and then rallies above $35 is a longer-term uptrend likely emerging. Downside targets include $29.75 and $26.50. At the moment, the only positive attribute for the stock, from a price perspective, is the dividend currently yielding 4.4%. That yield will improve if investors are able to pick up the stock at a lower price.

First Energy (NYSE:FE) broke below support at $33 on more than double the average volume, indicating a further slide.

Target (NYSE:TGT) is also in a downtrend since the summer of 2013, and broke aggressively below support in the $59 region on May 6. The 3.72% sell off, on almost triple average volume, shows the short-term rally over the stock is heading lower again. The February low at $54.66 may provide some support for a time, but is likely to give way as the downtrend continues. A rally from this point above $62.88 is a bullish sign and indicates the stock is starting an uptrend. Downside targets include $53.50 and $47.75 based on Fibonacci extension levels.

Target (NYSE:TGT) is also in a downtrend since the summer of 2013, and broke aggressively below support in the $59 region on May 6.

Yelp (NYSE:YELP)  had a great start to the year, but since hitting $101.75 in March the stock has lost almost half of its value. The very high volume over the last month shows the aggression of the sellers to liquidate, but also indicates a significant correction (higher) could soon emerge. Too early to go long yet -- since sellers are still piling in, dropping the stock 13.39% on May 6--a rally above the two-month downward trendline could spark a bear-market rally. The rally, if it develops, should falter by the time it reaches $85, likely before. Small rallies that are halted by the trendline present short-term shorting opportunities while sellers are still aggressive. Given the sharp decline, and lack of any major pullbacks so far, a downside target is difficult to establish. One area of probable support is $43, a price where buyers gapped the stock higher in August 2013.

Yelp (NYSE:YELP)  had a great start to the year, but since hitting $101.75 in March the stock has lost almost half of its value.

Twitter (Nasdaq:TWTR) fell 17.81% on May 6 on the busiest day of the stock's history. Volume was about 10 times average, and was greater than even IPO day. A "lock-out" period ended which allowed some redistricted shareholders to liquidate their stock. Given the decline over 2014, investors took the opportunity. With such massive volume though, many of the "hurting" investors are now out of the stock. Such a surge in volume following a decline is more typically associated with a (near) bottom, as opposed to a continued sell-off. Buying on the volume surge is not enough evidence though, as the price could continue to decline as the last worried shareholders dump their shares. A rise above $36.25, under this specific circumstance, may be all that is needed to get buyers back into the stock and pushing higher...potentially quickly.

Twitter (Nasdaq:TWTR) fell 17.81% on May 6 on the busiest day of the stocks history. Volume was about 10 times average, and was greater than even IPO day.

The Bottom Line

Volume can aid in analyzing what is happening with price, but can be deceiving. Strong volume can confirm a move, which has likely happened in First Energy and Target. Yet when volume skyrockets, it is more likely to indicate a reversal is near (at least short-term) than a continued move in the same direction. Twitter could soon be an example of this. Volume is evidence, used to provide a trading edge, but interpretation of volume (or price action) won't always be accurate. Therefore use stop losses when trading and don't trade too big for your account.

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