2. Scan for stocks with rising daily volume You may have heard the saying ‘follow the smart money’ and ‘smart money leaves clues’. There is no better way to identify where the smart money is placing its money, than by looking at the volume. Marcel Link put it succinctly in his book ‘High Probability Trading’ when he said:
Volume is a great precursor to major market moves, especially in stocks that have been beaten down for more than six months or even over a few years.
The smart money has an uncanny ability to identify value within quality stocks. You will notice on the charts, a stock may be in a downtrend for a year, which then experiences six months of sideways consolidation, followed by increasing volume.
As a rule of thumb, this is the smart money starting to average in to a well-heeled position in order to ride the next wave up.
On an end of day basis, this scan bodes well in conjunction with a new 60-90-day high. You have a stock that has been consolidating and getting accumulated, which then breaks into a new recent high on rising volume. This situation is ripe for a strong break to the upside. Running a daily scan to identify opportunities
The situation mentioned above is ideal, but the rising volume scan I am referring to here is a little different.
Instead of looking at opportunities that may be a precursor to a strong 3-6-month move, we want to identify stocks with momentum over the next 1-3 days.
To do this, we run a scan, which locates stocks where the volume has been rising for the last 2 days.
This type of scan is brilliant at the low end of town, i.e. the speculative stocks.
What is the code in Metastock? VOLUME>Ref(VOLUME,-1) AND Ref(VOLUME,-1)>Ref(VOLUME,-2)
As you can see, we want yesterday’s volume to be more than day 2, and day 2 volume to be greater than day 1.
You will be amazed at the kind of stocks that get brought up when you run a scan like this. It is not uncommon for this scan to identify low cap stocks that move 10-50% over the next 5-20 days.
Remember, the smart money leaves clues and volume is one of the biggest clues possible.