Volume is one of those indicators that gets overlooked, likely because it's shown by default on almost every chart, making it a little dull. But volume is what drives markets. Big volume jumps can indicate active interest in the current trend, or it can indicate a likely reversal as very high volume, relatively speaking, doesn't usually last for long. Here I look at four stocks showing big volume increases over the last few sessions, to see if these stocks are likely to continue higher or are fast approaching a cliff.
Cubist Pharmaceuticals (Nasdaq:CBST) has jumped from $49.51 on May 17 to $55.46 on May 21 with volume three to four times typical. The price surge resulted in strong resistance near $50 being broken, which should now act as support. Since 2010 the overall trend has been up, and while this volume spike is significant right now, over the last several years volume spikes have been even larger. Therefore, I don't see this volume increase as a topping signal. While a short-term pullback is likely, overall the uptrend looks healthy, especially if a pullback finds support at $49.50 or above.
SEE: Technical Analysis: Support And Resistance
Warner Chilcott (Nasdaq:WCRX) has surged since it opened at $15 on May 10 to trade at $20.61 on the May 21 close. Over those sessions, volume has been upwards of five to 10 times average. This is the biggest volume the stock has seen, but the price is still not even close to long-term resistance levels at $23.28 and $25.92 (2012 and 2011 highs, respectively). While the short-term trend is up, and offering volatility to short-term traders, longer term the stock has whipsawed up and down. While there still looks like there could be a bit more upside, I can't see volumes at this level being sustainable, therefore, I believe a sharp pullback is likely. A drop below $18.35 could trigger it, as we'd already be seeing some selling if it approaches that price.
Herbalife (NYSE:HLF) broke above the downtrend sloping trendline (going back to May 2012) in May 2013 and has been piling higher since. The upward push was accentuated on May 20 and 21 as the stock did nearly five times typical volume and jumped more than 10% in price. While the additional interest in the stock may be icing on the cake, I believe the dominant factor here is the shift from downtrend to uptrend. Support is at $42.50, so pullbacks that stay above that over the coming weeks look to be potential buying opportunities. Additionally, a breakout from a triangle pattern indicates an eventual target of $62 to $67.
SEE: Support & Resistance Basics
Sony (NYSE:SNE) saw a nearly seven times normal volume jump on May 15, after which it pulled back about 10%, but May 21 saw the price surge once again to a new 2013 high on nearly five times normal volume. Sony has been in a long-term price decline - the stock is worth about one third of what it was in early 2007. Strong rising volume coupled with the price appreciation over the last several months could indicate a bottom has formed though, and the initial wave of a longer-term uptrend is underway. Given the risk though, I think the price is a little too elevated short term, and would like to see a pullback hold above a prior low - $16.09 - before looking at taking a long position.
The Bottom Line
Volume is a great indicator, but it can be hard to interpret at times, since sometimes a volume spike means a reversal and other times the opposite. Look for a historical context within the stock to help determine if volume spikes are important and what sort of price action has followed them in the past. Volume isn't an indicator to be used in isolation. Check both short and longer-term time frames to see the overall outlook of the stock and from there, try to decipher an entry point that allows for risk to be balanced with potential reward.
Charts courtesy of stockcharts.com
At the time of writing, Cory Mitchell did not own any shares in any company mentioned in this article.