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Volume is a vital component of technical analysis. Prudent investors that incorporate volume into their stock analysis have often benefited several fold. Ideally, healthy stocks will more often tend to rise on higher volume and pullback on lighter volume. Volume is a great proxy for institutional sponsorship. Conversely, high volume declines can be an ominous, as this usually signals distribution and further price deterioration are more likely to follow.
West Pharmaceutical Services Inc. (WST +0.66 or 1.28% to $52.13) marched into new high territory with average volume today after spending the past 6 weeks consolidating in a tight trading range. This stock was first featured on Friday, September 1, 2006 in the CANSLIM.net Mid Day Breakouts Report (read here) as it was blasting above its $40.08 pivot point on the necessary volume to trigger a technical buy signal. However, this stock never managed to make any significant headway and stalled at $42.66. Then it endured some heavy distribution on 9/15 and 9/19 and it quickly pulled back and tested its 50 DMA. The October 12, 2006 edition of the CANSLIM.net After Market Report (read here) highlighted the stock's action, noting a technical sell signal when it fell below its pivot point by more than the -7% threshold. Additional remarks at that time included the notion that, "If the stock completes a sufficient base in the next few weeks, there is a chance it may eventually start looking like a good setup again." Indeed, it found support near its 50 DMA line and spent the next few weeks rallying back to its prior highs. A few weeks later, this issue blasted into new high territory with gains backed by the necessary volume to trigger another technical buy signal. On November 2, 2006 this stock was featured in the CANSLIM.net After Market Report (read here) highlighting its fresh breakout action.
Ideally volume would swell to above average levels as this issue advances into new high ground, as volume needs to rise at least +50% above average to trigger a proper new buy signal again. Meanwhile, technical support would be expected near its 50 DMA line ($47.63) and above its November 28th chart low ($47.60), and odds favor that further gains will follow.
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A classic example of the success enjoyed by many CANSLIM.net readers usually starts when an investor reads a CANSLIM.net report and buys a featured stock before it has risen above the pivot point by greater than 5%. After a stock breaks out above its pivot point, there is only a +5% window that investors have to purchase the stock under the proper guidelines. Once a stock rises above the "maximum buy price" the risk of a shake out balloons, meaning that even a normal retracement in the stock might force you to employ the 7-8% loss cutting rule. Much can be told by the stock's daily action in the weeks and months that follow a breakout. Typically, a light volume and orderly pullback suggests that the bulls remain in control. However, high volume pullbacks that violate support paint a totally different picture.
West Pharmaceutical Services Inc. (WST +3.88 or +8.00% to $44.64) jumped to a new all time high on Thursday after reporting healthy third quarter results. This stock was first featured on Friday, September 01, 2006 in the CANSLIM.net Mid Day Breakouts Report (read here) as it was blasting through its $42.08 pivot point on the necessary volume to trigger a technical buy signal. However, this stock never managed to make any significant headway and stalled at $42.66. Then it endured some heavy distribution on 9/15 and 9/19 and it quickly pulled back and tested its 50 DMA.
The October 12, 2006 edition of the CANSLIM.net After Market Report (read here) highlighted the stock's action, noting a technical sell signal when it fell below its pivot point by more than the -7% threshold. Additional remarks at that time included the notion that, "If the stock completes a sufficient base in the next few weeks, there is a chance it may eventually start looking like a good setup again." Indeed, it found support near its 50 DMA line and spent the next few weeks rallying back to its prior highs. After reporting third quarter results, today it surged to new high territory with considerable gains coming on nearly twice its average daily trading volume. It was also encouraging to see it rally on a day when the major averages and most stocks pulled back. Now that it has cleared all chart resistance and reached a fresh all-time high close with gains on greater than +50% above average volume, the odds favor further upside action. Any reversal back under its prior chart highs would technically negate the breakout and prompt concern.
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A very important technical tool that savvy investors have learned to incorporate in their technical analysis is the 50-day moving average (DMA) line. The 50 DMA line plays a pivotal role relative to a stock's price. If the price of a stock is above its 50 DMA then odds are that its 50 DMA will act as formidable support. Conversely, if the price is below its 50 DMA then the moving average acts as resistance. Healthy stocks sometimes trade under their 50 DMA lines briefly, but usually a strong candidate will promptly bounce and repair a 50 DMA violation. When a stock has violated its 50 DMA line and then lingers beneath it, the stock's outlook gets worse and worse as it spends a greater period of time trading under that important short-term average line. Once the 50 DMA line starts sloping downward it should also be acknowledged that the stock has been struggling for a while, and it might be time to reduce exposure and look for places to put that money to work in stronger buy candidates.
West Pharmaceutical Services Inc. (WST +$1.38 or +3.23% to $41.36) closed higher on below average volume as it quietly continued consolidating above its 50 day moving average. This stock was first featured on Friday, September 1, 2006 in the CANSLIM.net Mid Day Breakouts Report (read here) as it was blasting through its $42.08 pivot point on the necessary volume to trigger a technical buy signal. However, this stock never managed to make any significant headway and stalled at $42.66. Then it endured some heavy distribution on 9/15 and 9/19 and it quickly pulled back and tested its 50 DMA. Although it found support near that important short-term average, WST triggered a technical sell signal when it fell below its pivot point by more than the -7% threshold. Knowing when to sell a stock is an important element of the CAN SLIM (R) investment program. If the stock completes a sufficient base in the next few weeks, there is a chance it may eventually start looking like a good setup again. However, the lack of volume behind its most recent gains is a reason to still be skeptical of it for now.
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View all notes | Alert me of new notes | CANSLIM.net Company Profile