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Why New Highs In Low Volume Can Halt A Big Run

A great company is like a high-performance Porsche. Volume is the stock's fuel. If you desire to master when to sell stocks correctly, remember this analogy.

You can go on all day about the company's potential, its fabulous new product, and incredible CEO. But if the company's stock, after making a great run, begins to hit new highs on low volume, it will likely cease to act like a high-performance roadster. The stock may be beginning to put on the brakes on its spectacular run.

When new highs keep occurring on low volume, it's the prime time to be looking for serious sell signals.

After a stock sees a volume dry-up at the peak, be ready to sell at least some shares when it drops very hard through the 50-day moving average on high volume. Or, the stock may shatter a long-term trend line.

A stock's volume often tracks above its 50-day moving average when its price climbs to new high ground. This is where the stock has never been before. There is no overhead resistance, and buyers should be luring offers with their increasing bids.

If this doesn't drum up the increased volume, you have a problem. Remember, too, that the uptrending stock already has had institutional support behind it. That's how it got to be an uptrending stock.

What do you think would happen if the big-money funds stopped buying? The stock would fall under its own weight. And if you find the stock consistently making new highs without solid volume, that's a sign that the tide may be turning. That is, sellers may have more influence over the stock's future prices than the buyers.

Titan made a new high in May. The stock rebounded from its 50-DMA and progressed well on above-average volume. The rally extended further in June–July. But, the gains in July came in poor volume. After making a new high in July, the stock corrected more than 20%. The same price-volume action can be seen during October when Titan made a new high on low volume and corrected more than 20% from there.

Related:How and When to Book Profits

Read our last week article on: A Follow-Through Day

Disclaimer: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. It is for educational purposes only.

Performance computations reflect a time-weighted rate of return and includes a brokerage of 0.5%. All holdings are rebalanced to equal rupee amounts daily. Dividends are not considered in computations. Percent gains and losses are calculated for all issues that remain on the “Current Holdings” at the end of the day. For stocks that were added to “Current Holdings”, the basis used to calculate the percent change is the price noted when the issue appeared as a “Current Holdings” in MarketSmith India. For stocks that were removed, the selling price used to calculate the percent is the price note d when the issue appeared as “Removed” in the MarketSmith India. For more information, see our Legal disclosures here.

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