Volume ... more thoughts on weak stocks

When I last wrote on these pages I was attempting to develop thought and charts to explain how I see volume. We started with stocks that were declining and the initial set were stocks that saw huge (price wise) declines in short periods of time. These charts exhibited large volume spikes on large downside prices declines. I had tried to distinguish between distribution versus stops being hit and naturaly (though hurried) profit taking occuring.

In this iteration on volume tells, I'm looking at weak stocks where volume and price declines are not sudden as before. These types of declines, when they persist, are almost always a sign of consistent distribution occuring. That distribution is from both large and small players and I suspect, is the consistent cashing out by larger holders at prices that still make them fortunes. The ones holding the bag in these cases, are all the little folks who bought the story associated with the stock and whoose approach to stock investing/trading is to buy and hold. K has shown a consistent uptrending pattern for a good two years now until the past three month where it has began to trend lower. This lower trend is concerning if you are long because it is reaching that critical point where it is either going to begin to exhibit a perpetual crawl towards lower prices or it will find support and begin to trend higher once more.

The typical pattern that I'm looking at in this and the next chart is that you have some sponsor or sponsors of the stock during the price rise. The story is good and everyone wants to buy it. It's likely that the larger holders of the stock have gotten a special deal and are sitting on huge profits after the two year run. As the stock begins to weaken (either because the story was false/fake and/or because the fundamentals have changed) the larger holders start to distribute into the late comers, folks who are unaware that the trend is changing. The story is still told and the blind buy, but those who are in the know are slowly getting rid of their stock. Note, they are holders of hundreds of thousands of shares. It takes them a while to distribute their stock. That distribution usually takes place towards the top; at the topping phase; and all the way back down.

Take this next stock which has made the complete trip already, WLV. This stock was given a story and that story was sold to the public (look back at the press clippings if you don't believe me). It was the best thing since sliced bread. As it neared a topping point, the insiders we likely selling as fast as they could without crumbling the price too much. They did that all the way across that long topping pattern for a year in late 2004 through late 2005. When the price broke though, they distributed what they had left all the way down and finally the late comers were washed out at new lifetime lows just recently on a nice volume spike. Now the bottom feeders will likely come in again.

This article along with the previous one exhibits the two common patterns associated with declining stock prices and it attempts to distinguish between distribution and profit taking/stop losses as that's the key to staying out of trouble. The golden rule is that if you can't distinguish between the two on a given chart, then simply stay away. There's other places to spend your money rather than flipping the coin. The other golden rule is that you usually need not be in a hurry to buy a weak stock. Even if it's distribution, there is almost always a retest of the lows before a sustainable rally can occur. This gives you and entry and exit point you can live with. That's the safe way to play long entries on such chart patterns.