Sunday, June 28, 2009

When does volume not matter?

In a way, I guess it always matters when analyzing trading opportunities, but there are times when it doesn't fit the pattern. Royal Gold (ticker: RGLD), my favorite Gold stock right now, and one I am invested in heavily (and therefore not unbiased) got jacked on Friday out of the blue on heavy volume. I am not thinking about selling or getting bearish, but one certainly has to consider high volume days, as big money moves markets and we retail traders are simply fleas on the elephants' backs. The trick is to get in before the elephants and then get out before the elephants do.

There were some weird volume patterns on Friday, but I think they relate to the "window dressing" concept, which describes how mutual funds and other institutional investors trick retail investors into thinking they're smart. The quarter ends on Tuesday and the market is up for the quarter, so those fund managers desperate for yield reshuffled portfolios to show everyone reading ads in Fortune magazine that they are with the trend and doing OK.

Here's an example daily chart of the S&P 400 mid-cap index ($MID) over the last 22 months:

Window dressing (and/or the infamous Plunge Protection Team) is the only volume pattern that makes sense for me. Waiting until the last possible day of the quarter carries risks if you're a "window dresser," not that we may not see some wierd stuff on Monday or Tuesday. Come July 1st, we'll have no window dressing and no pending options expiration issues to deal with. Be careful out there if you're not short.

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