516.015.5
AT&T (24.63, 24.75, 23.81, 24.06)
washout low16
23
30
6November
13
20
27
411December
test18
26
22001
8
16
22
29Febru
On the above chart we see that the stock had been in a long decline. Finally it gappeddown on huge volume and seemed to get rid of the last of the sellers. That was followed by a weak rally, then a return to the low, before a believable rally could get underway.Often, though, we will see lows that look more like tops, in which we have a series ofheavy volume days with a very tight trading range. Instead of a panic sell off, thedecline ends with a gradual shifting from weakness to strength. When that happens arounded bottom develops, which we often call a saucer bottom. This sort of low can bevery profitable. It forms a wide base, and therefore is likely to lead to a substantialadvance. The chart that follows pictures a typical saucer bottom. Notice also theimpressive upside volume as it emerges from the saucer.
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TRADING WITH EQUIVOLUME
Ease of Movement (0.00309), Ease of Movement (0.01360)
0.05-0.00-0.05-0.10-0.15-0.20
RAZORFISH (2.406, 2.125, 2.313)6.56.05.55.04.54.03.53.0
saucer bottom
2.52.01.51.0
16
23
30
6November
13
20
27
4December
11
18
26
282001
16
22
29Febru
That upside volume out of the base would be a strong signal to cover short positions,and even to go long.
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19
BUYING THE BREAKOUTSThe classic technical picture that I particularly like to use for trading, is a stock that hashad a long decline, given signs of a bottom, built a substantial base and has then sent asignal of strength. All of these earmarks are exhibited in both price movement and volume characteristics. On the stock chart that follows we are looking at a quite typicalformation of this sort.Ease of Movement (0.2380), Ease of Movement (0.1668)0.40.30.20.10.0-0.1-0.2-0.3KULICKE & SOFFA (16.563, 16.625, 15.688, 16.000)
17.016.516.0
square tops
breakout
15.515.014.514.013.513.0
resistance
12.512.011.511.010.510.09.59.0
square bottom23
30
6November
13
20
27
4December
11
18
26
8.522001
8
16
22
29Febru
I have made a number of notations on the chart. The first is the square top that we sawas it tried to rally after a long decline. The heavy volume and lack of progress suggested that it was encountering formidable overhead supply, and could not get through.Then it went down to a level where we saw the same sort of square entries, but now onthe downside. The next rally was more encouraging because, for the first time inmonths, volume was coming in as the stock went up instead of becoming heavier as thestock went down. But when it got back to the old resistance it again stalled, and madeanother series of square tops. The sellers were still there, and would not let it throughthe barrier. It pulled back again, but not so far, and the volume was lighter. We werestill in a base area, but it was becoming more encouraging. Then, on the next rally itbroke out! Notice the Equivolume box it made on the breakout: a tall box showing thatit was moving well, but heavy volume showing power. The stock appeared to be on itsway.
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TRADING WITH EQUIVOLUME
The breakout box is what I like to call a “power box”. A tall thin box that lacks volumeas the resistance is penetrated is suspect. There does not seem to be enough convictionbehind the move. A short and wide box through resistance is equally suspect, becauseit is obvious that there are many big sellers just above the old resistance level. But a tallbox that also has width indicates a very strong situation. There are many aggressivebuyers, and the sellers are toppling before them. That is the sort of breakout box wesaw in the stock above, and those are the situations we should be searching for.Lets look at another power box breakout and the results.Ease of Movement (-0.02231), Ease of Movement (-0.1061)
0.50.40.30.20.1-0.0-0.1-0.2-0.3-0.4-0.5
REPUBLIC SVCS (15.938, 15.813, 15.813)
18.0
square highs
17.517.016.516.0
power box
15.515.014.514.013.513.0
breakout level
12.512.011.5
washout low
11.010.5
317August
14
21
518September
25
2October
9
16
23
30
613November
20
411December
18
26
22001
8
16
22
After a long decline the stock gapped down, and a day later it traded very heavy volume in a fairly wide trading range. That had the look of a bottom starting to form.Next it rallied on very light trading before dropping back to the old support area onenormous volume, creating an oversquare day. After two more days in the same bottoming area it moved sharply higher. It was a tall box with good volume, suggestingthe stock had made a legitimate turn. Moreover, it went through the level where it hadbeen turned back on the prior rally, making it look like a breakout from a base. In thenext few weeks the stock went up about 35% before encountering heavy resistance.Finally, we see the square Equivolume entries on the highs. That was a strong hint thatthe advance was ending.
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21
Below is a final example of power boxes to the upside. Also notice the typical squareentries on both the highs and the lows for each cycle.
0.350.300.250.200.150.100.05-0.00-0.05-0.10-0.15-0.20-0.25-0.30-0.35-0.40
Ease of Movement (0.02741), Ease of Movement (0.1444)
AMER WIRELESS (24.44, 23.38, 23.94)25.5
square tops
25.024.524.023.523.022.522.021.521.020.520.019.519.018.518.0
power boxes
17.517.016.5
square lows29October
16
23
30
613November
20
27
4December
11
16.018
26
22001
8
16
22
29Febr
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TRADING WITH EQUIVOLUME
BUYING CONTINUATION PATTERNSThe other favorite signal for buying is a continuation of an earlier breakout. As withthe breakout, we want to see heavy upside volume through an old level of resistance.Moreover, we want to be sure that the stock has the right volume characteristics. Thatis, it needs to be receiving heavier volume on advances than on declines. Thirdly, itneeds to have the potential to move a good deal further. The stock must have enoughof a base to suggest the advance is not likely over yet and that the objective is at a higher level. Determination of objectives, and the cyclical nature of stock that is implicit inthe volume-to-volume relationship is covered more fully in the book “Volume Cycles inthe Stock Market”. For this discussion, understand that the width of the base is usuallyvery nearly the same as the width of the ensuing advance. Similarly, the width of a topis about the same as the width of the decline that follows.Ease of Movement (1.597), Ease of Movement (0.7672)
3.53.02.52.01.51.00.50.0-0.5-1.0-1.5-2.0
AMETEK (26.375, 27.063, 26.250, 26.938)
28.027.527.026.526.025.525.0
buy signal
24.5
!
24.023.5
resistance
23.022.522.021.5
continuation buy signal
18 25
216October
20.5
objective
base611September
21.0
20.019.5
23
306November
13
20
27
4December
11
18
26
22001
8
16
22
29Feb
This stock built a very wide base lasting about three months. I have shown that base asthe distance between the two vertical lines. It gave a buy signal as it came out of thatbase. Volume was much heavier as it penetrated the resistance. After moving sidewaysand then higher, it again had an upside power box a month later. I show that as thecontinuation buy signal. The two vertical lines show the width of the base. Remember,since this is an Equivolume chart we are really measuring an amount of volume not an
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TRADING WITH EQUIVOLUME
23
amount of time. I have measured sideways a distance equal to the base, and marked itas the objective. Since the second indication to buy came well short of that objective, itwas a believable signal. Notice that the high came in just about where it had been forecast.Ease of Movement (0.3710), Ease of Movement (-0.09831)
1.0
0.5
0.0
GENUINE PARTS (25.63, 25.75, 24.88, 25.63)
28.027.527.026.526.025.525.0
buys
24.5
!
24.023.523.0
!objective!
22.522.021.521.020.520.019.5
runup
base29October
16
23
30
6November
13
20
27
19.018.518.0
4December
11
18
26
22001
8
16
22
29Febr
Here is another example of multiple opportunities to buy. Each time the stock ranthrough a resistance level volume expanded. Each time it pulled back volume contracted. The wide base justified a long advance. The stock finally encountered resistanceand went square, suggesting the move was over. Obviously, the examples shown arechosen to illustrate the principles. Not all stocks behave so well all of the time.Therefore it is important to always have a stop order, or at least an idea as to what sortof action would say that a bad decision had been made. We will be looking at stop levels a little later.Every buy suggestion that appears on the website is derived by looking for either a newbreakout or a continuation pattern. Within the time frame we are using, they are theonly formations that carry big odds of being correct. For example, in a longer-termdecline there are often countertrend rallies, but they are usually on light volume andare short lived. Since the longer-term trend is down, the risks are too large to be buyingsuch a formation. As we said above, thinking a stock is through going down is not reason enough to buy, either. The stock could be through going down but not ready to goup, meaning money might remain idle while waiting for the move to develop. The reaArmsInsider.com
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TRADING WITH EQUIVOLUME
son for buying a stock is to participate in an upward move. The best time to buy thestock is when others have just started to. Big buying evidences itself in heavy volumeand a wide trading range; a power box on the Equivolume chart. We don’t ever wantto be contrarians. We want to agree with others, but only very early in the move. Thebig volume move is usually caused by professional money coming in. Later in theadvance the amateurs are buying. We want to be on the side of the pros.There is one variation on this strategy that we do use however. In some markets, and insome instances, a power box is followed by a light volume pullback. That pullback islikely to return the price to somewhere near the breakout level. In a fast running stock,or a greatly oversold market, we sometimes do not see many such pullbacks. At othertimes they are quite common. They can often give us the opportunity to buy at a somewhat better level. Depending upon the stock and the way it is acting, we sometimeswill suggest waiting for a pullback to buy. At other times, where it is less clear, we suggest taking a partial position on the breakout, another partial on the pullback and athird piece when the rally resumes.On the chart that follows we see a case in which the breakout, while dynamic, was worrisome because it was so oversquare. It said that the move was already encounteringresistance. Therefore, one would be inclined to wait and see if it would pull back somebefore going higher. Particularly important is to be sure that volume dries up on thepullback. It says that the sellers are running out of energy. The resumption of theadvance should be accompanied by an increase in volume, as in the example. The bigbuyers are back in, and it looks as though they will run the stock higher.
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25
Ease of Movement (0.03092), Ease of Movement (0.2198)
0.5
0.0
-0.5
-1.0
GEOWORKS (5.125, 4.500, 4.594)
10.510.09.59.08.58.07.5
oversquare breakout
7.06.56.05.55.04.54.0
resistance
3.53.0
resumption
2.52.01.5
light volume pullback29October
16
23
30613November
20
27
411December
18
26
22001
8
1.00.5
16
22
29Febr
Here is another example, in which wee see a typical lighter volume pullback beforeresuming the advance.
Ease of Movement (1.349), Ease of Movement (3.249)
3.53.02.52.01.51.00.50.0-0.5-1.0-1.5-2.0-2.5-3.0
INTL RECTIFIER (47.63, 42.63, 47.13)
5453525150494847464544434241403938373635343332313029282726
resumptionpower box
pullback23
30
6November
13
20
27
4December
11
18
26
22001
8
16
22
29Febru
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TRADING WITH EQUIVOLUME
WHEN TO SELLBefore ever buying a stock it is desirable to decide where to get out. There should betwo events in mind, the selling to take a profit and the selling to correct a mistake.Then, as time goes by and the position starts to move, it is necessary to continuallyreevaluate those decisions, and adjust them. Each position should be revisited at leastdaily; to be sure the situation has not changed.Lets first look at when to get out if we are wrong; and being wrong on many positionsis inevitable. The best looking situations sometimes don’t work out. But staying with abad position can be disastrous. As soon as it looks as though the stock is not going toact as expected the position should be closed out. That means either having a stoporder entered that will take out the position automatically, or having the discipline toadmit a mistake. On the website, buy recommendations are accompanied by a suggested level for a stop order.Ease of Movement (-0.1129), Ease of Movement (-0.00775)0.5
0.0
-0.5
ALTERA (28.88, 29.75, 26.88, 29.13)
70
6560
5550
A
C
4540
3530
washout
3July
10
17
24
31August
7
14
21
51118September
25
B25
2October
9
1
6
23
30
20
6November
13
20
27
On the stock pictured above it looked as though it was a very promising buy. After along decline there was a heavy volume washout, with an oversquare entry. After somebase building there was a sign of strength at “A” that looked like a time to buy. Thepullback to “b” was on lighter volume, suggesting the position was valid. But then thenext rally was bothersome. It lacked volume, and could not penetrate the earlier high.At “C” volume became very large as it dropped. This was unexpected, and suggestedArmsInsider.com
TRADING WITH EQUIVOLUME
27
the stock was not acting right. A nimble trader might have thrown in the towel there.If not, there should have been a stop order below the prior low at “B”. It would havebeen executed a few days later. Either way, the stock had told us that it was not actingas expected. That, rather than a percentage rule, should be the criterion for covering aposition. In fact, not just in taking a loss, but also in any covering of a position, itshould be based upon the observation that the move is no longer acting well. After astock has moved up, and is showing a profit, it is still suggested that a stop be used as adiscipline for getting out if the stock starts to do the unexpected. We saw in the sectionon tops that a clue to the end of a move is an oversquare day. That could be consideredto be another case of “not acting right”. Later we will look at some other technicalanalysis tools, such as gaps, support and resistance levels, flags, pennants, etc. Each ofthese tools is designed to help us to see what is likely and normal in a stock’s movement. They will help us to know when a stock is acting “wrong” and should be sold.Even the work on objectives is meant to alert us to the unexpected. If a stock acts as weexpect, we should stay with the position, but as soon as it acts wrong, it should be gone.On the chart below we have a good example of the many features we have been talkingabout. Notice, though, how it acts after the strong advance out of the base. It looks asthough it has penetrated another resistance area and is likely to move higher. But thenit backs off with a somewhat square entry that is worrisome. The next day it tries toresume the advance, but is unable to, even though volume is immense. The result is avery square Equivolume entry. It is clear that something is changing. The unexpectedhas come to our attention. It appears to be time to get out. Besides, the width of theadvance is just about the same as the width of the base, so our objective has been satisfied.
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Ease of Movement (0.8845), Ease of Movement (2.057)
543210-1-2-3
KENT ELECTRONICS (21.63, 21.06, 21.63)
24.5
squarecontinuation
24.023.523.022.522.021.5
breakout
21.020.520.019.519.018.518.0
resistance
17.517.016.516.015.515.014.5
pullback
14.013.513.0
6November
13
20
27
4December
11
18
26
282001
16
22
29
5February
Knowing when to sell is not an easy task. A buy can be unemotional, but once a decision has been made to buy, there is a reluctance to admit being wrong, and a desire totake a profit to prove being right. That leads to less objective decisions. I have found,in my own trading, that I have to force myself to sell “too soon”. When I own a stockand it has moved with me, I get to like it. That allows me to make excuses for it.Abandoning a winner is like kissing off a friend. There is a tendency to give a winnermore leeway than a loser. But that is a mistake. Just because a stock has gone up tenpoints after you bought it should not serve as a reason for allowing it to back off five ofthose points without selling it. I have had to learn to grit my teeth and abandon myfriends as soon as they disappoint me.
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29
SELLING SHORTAn aggressive trader should be as willing to go short as to go long. There are two sidesto the market, and they might as well both be used. It is often argued that the shortside is more dangerous than the long side because there is no limit to losses. True, but atrader should never stay around long enough to find that out. As soon as a positionstarts to act wrong, the short should be covered.In a way the short side is safer than the long side for a trader. That is because most upmoves take twice as long as do down moves. Therefore, if you are long, the positiongoes with you slowly but against you rapidly. Conversely, if you are short, the positiongoes with you rapidly but against you slowly. You are likely to have more time to correct mistakes.In shorting a stock using the Equivolume methodology, the principles are similar butinverted. In buying a stock we wanted to see a decline, followed by a base buildingperiod, and then a sign of strength. If we are going to sell a stock short we want to seean advance, then a sideways consolidation, and then a sign of weakness. Just as wedid not want to buy just because a stock appeared to be through going down, we do notwant to be short sellers just because it appears to have stopped going up. Rememberthat every trend has a better chance of continuing than it does of reversing. If we sell itbecause it appears to be through going up we are statistically fighting the odds. It isabout a two to one chance that the consolidation will be followed by a resumption ofthe advance rather than a break to the downside. So, before selling we have to haveinformation that tells us the trend has reversed.A sign of a top, such as a large oversquare box, is a very good reason to take a profit ona long position, but not a reason to sell short. The stock could languish for a long timein the sideways area, so the money would be inactive.
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Ease of Movement (0.2208), Ease of Movement (0.1412)
1.00.50.0-0.5-1.0-1.5-2.0-2.5-3.0
JLG INDUSTRIES (12.000, 11.813, 11.813)15.5
breakdown
15.014.514.0
support
13.513.012.512.011.511.010.510.0
oversquare low
9.59.0
6November
13
20
27
4December
11
18
26
22001
8
16
22
29
5February
On the chart above we are looking at a good example of a successful short position. Inthe early part of the chart we see the last part of an advance. The start of the top building process is not easily noticed. But then it makes a second top at the same level andbacks off to the support zone. But there is still no reason to be selling this stock until weget the power box to the downside. That is a definite breakdown, and a strong suggestion the stock will go lower. We might wait for a light volume rally to the breakdownlevel, but in this case, it never occurs. The subsequent drop is rapid and large, and culminates with an oversquare Equivolume entry. That is definitely a signal to cover theshort position and take the profit. It is not a signal to go long. Perhaps you end up,later, buying at a higher price, but by then you have built a base and had a sign ofstrength.The chart below gives us another good example of a short sale. This stock, Microsoft,had a fast advance in October, which then turned into a sideways consolidation. Thepullback in early November established a support level for us to keep an eye on. Thatsupport was broken with a big trading range, although the volume was not particularlyheavy. But the next day it gapped lower, and both volume and range expanded, producing a power box to the downside. It certainly confirmed the sign of weakness wehad seen the day before. After a further slump over the next week it rallied, but onpoor volume, suggesting the decline had further to go. The decline did resume, withanother gap down and another power box to the downside. The stock fell from firstsell signal to its low point, about 30%, in just about a month. Notice also the nextArmsInsider.com
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31
power box to the upside. It penetrates resistance and takes the stock right up to thelevel it had been in prior to the short sale.Ease of Movement (0.04509), Ease of Movement (0.04598)0.100.050.00-0.05-0.10
75
MICROSOFT (63.56, 64.63, 63.13, 64.50)
70
break of support
65
support
light vol
60
55
power down
50
45
resumption
power up40
8
511September
18
25
29October
16
23
30
6November
13
20
27
4December
11
18
26
22001
8
16
22
29
5February
12
In the long-term scheme, the market has gone up more than it has gone down.Recently it went through a seventeen year long bull market. That means investors havebeen better off owning stocks than they would have been shorting them. But tradersare dealing with shorter-term moves. For them, a long-term bull market is of little consequence. There are waves within the tides that allow profits in both directions. Unlessone is trading a tax-sheltered account that does not allow it, a trader should be as willing to go short as to go long. To not do so is to ignore half the opportunities that present themselves.
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SUPPORT AND RESISTANCEA basic observation of all technical analysis, be it Equivolume or an older method, is thereoccurrence of price levels. As a stock moves higher it will encounter levels thatrepeatedly turn it back. Often, after that resistance level is surmounted, the same levelserves as support on declines. It happens enough so that we must pay attention tothose levels. If a long position moves higher, as expected, and reaches an old resistancelevel it has to be watched very carefully. Here Equivolume can often be extremely helpful, since we want to know more than just where the price is; we want to know howmuch difficulty it is having in moving. The box shapes are often a clue. SquareEquivolume entries at the old level are enough of a warning to justify taking profits.
Ease of Movement (0.02282), Ease of Movement (0.04518)
0.050.00-0.05-0.10-0.1536.035.535.034.534.033.533.032.532.031.531.030.530.029.529.028.528.027.527.026.526.025.525.024.524.023.523.022.522.021.5
FORD MOTOR (28.02, 28.74, 27.63, 28.33)
resistance
resistancesupport
support30
6April
13
20
27
4May
11
18
26
18June
15
22
29July
13
20 27
310August
17
24
31814 21September
28
5October
12
19
26
2 9November
23
On the chart above we see quite typical action. Across the center of the chart I haveinserted a horizontal line. Early in the period shown it served as resistance to upsideprogress. Later the stock moved up through that level, and subsequent declinesstopped at the same level. So the old level of resistance had become a new level of support. After the stock moved back down below that line, it again acted as resistance onthe right side of the chart. In addition, we see that there is a lower level of support thathas tended to hold the stock up repeatedly. It was penetrated at the right side of thechart, but briefly, and in a manner we should have recognized as being climactic.
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33
Ease of Movement (0.6998), Ease of Movement (0.3602)0.5
0.0
-0.5
sell signal
FOSTER WHEELER (9.000, 9.25