Cover Image for Rule #1 Question of the Week:  The Buy Line

Rule #1 Question of the Week: The Buy Line

Phil Town
Phil Town

**Note: This week's Question of the Week is also archived in the FAQ.

Q:** I'm looking at the 3 Tools, and nothing's crossing the Buy Line. Everything's floating slightly above or slightly below. Now what?

A: Stock prices definitely respond to human foibles. When someone is making money, we all want to make money. When someone is losing we all want to avoid the pain.

People in general, including money managers, tend to not want to be leaders. Leaders tend to get shot. So we hang out and wait to see what others think. This is your stock price wobbling along until everyone sort of psychologically agrees that this price isn't going to go down. Then it forms a kind of base or support and can start to build to a new high. Meanwhile, the signals in that sort of phase can wobble into three greens and sideways red red and nothing is really happening.

There is a secret weapon if you don't want to make the buys and sells. You can watch for a sudden upsurge of volume.

Watch the last twenty days of volume. On the chart (on most any charting site) you'll see that the average volume height is, let's say, 1 million shares trading that day. And for twenty days it hangs right at 1 million shares. Then suddenly BAM! the volume doubles to 2 million shares and the price moves up slightly. If you've got three greens, it's time to get in there.

The volume spike is one of the best indicators of the stock price readying itself to take off (or drop like a brick if we're in the red zone.)

Now go play.

Phil Town