April 22nd, 2009
Price Volume Distribution – most have never heard of this charting tool, have never seen it and, if they had, wouldn’t know what it means or how to use it. But it sometimes can be of tremendous help in finding where future resistance levels might be.
Let me first show you a Price Volume Distribution view of AKS (AK Steel) for the past 2 years (any time horizon is acceptable but this one illustrates the concept well)
The chart looks conventional except for one major difference: a second set of volume bars are added on the right panel in addition to the traditional volume for each time segment below the price chart. What each bar in the right panel represents is the volume that exchanged hands at each price level. Note: this chart is on an arithmetic price scale with each line spaced at $2.50 increments. On a logarithmic scale, the price graph would have been more correct on a percentage change basis but the horizontal price-volume bars would have been distorted.
See how the AKS price declines during August-September occurred on very little volume (translated, that means most were dumping their shares, at any price, to whatever buyers they could find). However, volume started picking up significantly as the price moved into the $5-10 range. As a matter of fact, 430 million shares traded around $10 compared with 197 million at $12.50 and 109 million at $15.00
What does this mean and why is it important? The chart is a visual representation of potential “breakout resistance”. Should the buyer herd muster sufficent strength to overwhelm and neutralize those who bought in the 12.50-15.00 range (in other words, those sellers are induced not to sell their shares at these prices) then there’s relatively little volume above that level and a relatively easy path to $30. As mentioned earlier, relatively few shares traded between 15 and 30 as compared with the volume above 30 and below 15.
But as soon as the price works its way up to 30 (270% above current levels), some of those who bought at 30 and above will finally and fortunately look at it as an opportunity to break even or to come close. The price-volume line at those levels will begin to extend out as more shares are traded.
Let’s take a look at another example: KIRK (Kikland’s). This stock has always fascinated me because: 1) it was one of the few stocks that finished up for 2008 and 2) it’s a furniture retailer, of all things, during a period that some feared might turn into a depression. KIRK is also a top IBD 100 stock. Here is its Price Volume Distribution view:
I added the trendlines in order to make the point that once KIRK was able to break through the resistance trendline at $3.25, there was little overhanging volume to absorb as it sailed to its current price above $6. It’s unclear when those buyers at prices below $3 will start selling to lock in their profits but when they do, those horizontal volume bars will begin to expand and prices will stagnate if not actually start to decline.
The message in most Price Volume Distribution charts aren’t as clear as these two and I’m not even sure how meaningful they are for shorter time horizons (days, weeks or months). It’s a feature that’s available in my Fidelity account and I assume would be available from other brokers as well. I’m not sure whether it’s available from the major online charting services.
It’s a tool I don’t use frequently enough but, as the market successfully completes this bottoming process (which I increasingly become more confident will happen by fall) and stocks start marching higher, I plan then to use this tool to develop some upside targets for stocks in my portfolio.