Price & Volume

One of the most challenging aspects of trading, especially in stocks with higher risk levels, is recognizing when subtle, but clear danger signs are present in stocks that look good at first sight.

Many people ask me what my favorite indicators are and what it always comes down to is two things: price and volume. Both need to be in confirmation, or you can be in serious trouble. For example, let's look at two stocks I've liked but that have been trashed by the market recently - PeopleSupport (PSPT) & Captaris (CAPA):

* You can pull up just price and volume charts for the comparison above, but I've used the BOP indicator in order to further enhance the illustration. In the charts above, please compare the two circled areas. Do you see any hints that indicated these were susceptible for a price decline?

In sum, I like to see volume and strength at new highs, not relative disinterest. Sure, not always will a decline in volume (and the BOP for that matter) at the highs precede an upcoming disaster, but many times it will provide ample cause for concern especially in stocks that have been good performers in the past.

For those of you who are on the hunt for short sell opportunities now, you'll want to identify stocks showing these same characteristics. Anemic volume and overall disinterest at the highs is a red flag that many stocks are showing at the moment. Until that powerful strength returns, the "guilty until proven innocent" stance should remain.