"Volume Spikes" a few years ago often signaled the end of a run up, or the final exhaustion pattern for a fast moving Swing style trade stock. Volume Spikes didn’t occur every day and the price action after a Volume Spike was very predictable, and so trading in anticipation of how price would behave after that spike was easy.
Since the increasing presence of High Frequency Trading HFTs firms over the past few years, Volume Spikes have become commonplace and do not necessarily represent the end of a run or a reversal pattern after a Swing speculative run. In order to understand what a Volume Spike means nowadays with HFTs creating these volume surges frequently in the most popular stocks Retail Traders prefer to trade, you must use Relational Analysis™ and understand more about what is actually going on.
Let’s start by explaining what a Volume Spike is and how it looks on a stock chart.
By the way if you truncate your volume, you will not have an accurate view of Volume for our markets of today. So do not truncate your Volume Bars.
Volume Spikes are just what the name implies. This is not a technical pattern that you will find in the old, outdated Technical Analysis books because the Volume Spike is a newer pattern. It used to be that mostly Price was studied in Stock Chart Analysis, and in particular End of Day price and Volumes were mostly ignored.
Since the advent of Online Brokers and Retail Trading, Dark Pools and High Frequency Traders HFTs, Volume now is often more important than Price analysis in many instances.
Below is a Volume Spike on CSCO, as the chart example. Relational Analysis™ is to combine both Price and Volume. Price gapped on a Volume Spike which means HFTs triggered the gap pre-market with their orders, which can automate with fill queues before market open getting in ahead of the smaller lots. Remember queues fill by the three requirements of "Price" first, "Time" second, and "Quantity" third.
So let’s go over how that works so you can understand why the huge order flow of Volume from HFTs, caused CSCO to gap on that particular day.
"Price" is the first element of the queue so if a Retail side order is for 20.00 and an HFT comes in at 20.01 the HFT order is placed ahead of the Retail order. If three orders come in at the same time, one at 20.00 for 100 shares, one at 20.00 for 1000 shares, and one at 20.00 for 5000 shares the order with the largest shares gets filled first. This maintains an orderly market flow. So the pre-market queue fills the placement in the queue based on "Price," then "Time," and finally "Quantity." So your order can get shuffled back if a big Fund wants to buy pre-market with a Large Lot order.
Therefore on this particular day, pre-market open news caused HFT computers to trigger orders in such high numbers that the stock gapped at market open. This can cause a lot of problems for Retail Traders who may not want to buy CSCO at that price.
Also HFT Volume Spikes are not predictable in terms of what is going to happen after the spike. You need to understand the relationships between Price, Volume, and TechniTrader® Quiet Accumulation TTQA before the HFT Volume Spike, to be able to accurately determine what price will do after that Volume Spike.
Therefore any time you see a volume spike on a chart, you must pause and evaluate what that Volume Spike means for near term price action. In this instance it did not mean a reversal, due to the Volume, TTQA patterns, and Price patterns that preceded the HFT Volume Spike. This is because the TTQA and Price exposed Dark Pools quietly accumulating.
We will continue our discussion of Volume Spikes next week. Be sure and register for the July 24th MetaStock and TechniTrader® Partner Webinar, in which I will be giving much more training on Indicator Analysis.
Trade wisely,
Martha Stokes, C.M.T.
For more information email: info@technitrader.com
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
http://technitrader.com
MetaStock Partner
©2013 Decisions Unlimited, Inc.
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