Strong Volume Equals a Strong Foundation

 | Dec 28, 2011 | 9:40 AM EST  | Comments
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Stock quotes in this article:

aapl

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goog

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isrg

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cmg

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alxn

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fosl

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hlf

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bidu

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ebix

Stocks with good potential to lead during new market uptrends tend to break out of bases -- or consolidation areas -- in heavy volume. Unfortunately, upside breakouts in strong volume have not been a common occurrence lately, due to light volume in the market overall. Also, risk still exists, especially in the current low-volume environment.  

While it's true that a new market uptrend was confirmed on Dec. 20, with big percentage gains in higher volume, meaningful base breakouts in heavy volume remain in short supply. This gives me pause, as does the fact that the month of December isn't exactly known for being a launching pad for new market uptrends.

The market dished up plenty of nice gainers on Tuesday, but volume was dismal in most cases. Institutional-quality names like Apple (AAPL), Google (GOOG), Intuitive Surgical (ISRG) and Chipotle Mexican Grill (CMG) all outperformed, but in light volume.

The weekly chart of Intuitive Surgical is a good example of what a breakout from a base-on-base pattern looks like. Shares close Tuesday at $463.47, up $5.81. It recently broke out above $449.06. Lack of volume, however, is potentially problematic. Strong buying demand makes for a good foundation for a stock, but the recent low-volume gains make its foundation suspect.

ISRG
Source: StockCharts.com

Apple also broke out recently in light volume, but it's not an example of a base breakout like ISRG. Instead, Apple broke out above a descending trend, which often signals a positive shift in trend, but the stock still has more overhead supply, or potential selling pressure, to work through as it makes its way toward its 52-week high of $426.70. The bottom line is that Apple is still in the process of building a base. I'd rather wait for a heavy-volume breakout in Apple than buy in anticipation of one. Shares closed Tuesday at $406.53, up $3.20.

AAPL
Source: StockCharts.com

The market served up two breakouts on Tuesday, but both were flawed to some degree. On the surface, Alexion Pharmaceuticals' (ALXN) breakout over $70.42 looked good. Shares rose $2.47 to $71.55. Volume was slightly above average at nearly 1.5 million shares. It normally trades about 1.2 million shares a day. However, a quick look at its weekly chart does not show much in the way of institutional buying.

ALXN
Source: StockCharts.com

Normally, it's good to see some above average volume weekly price gains, but there are none. The other area of concern with Alexion is that the stock has made a big price already. Tuesday's move was arguably a breakout from a late-stage base. Similar to other growth names, such as Fossil (FOSL), Herbalife (HLF) and Baidu (BIDU), among others, the big money might have already been made in Alexion. Breakouts from late-stage bases can work, but they have a higher failure rate.

Finally, Ebix (EBIX) broke out in heavy volume Tuesday, rising $1.18 to $22.45. The company provides on-demand software and e-commerce solutions to the insurance industry. Volume was impressive at just over one million shares, slightly more than double its average daily trading volume. This hints at least some institutional buying.

There was no news, but on a daily chart, the stock broke out over $21.89, its Nov. 30 intraday high. A quick look at its weekly chart shows that Ebix is still about 26% from its 52-week high, and it is still deep inside a much larger base that started in March. When a stock breaks out, the less overhead supply it has to overcome, the better. Too much overhead supply can make it tough for a stock to make meaningful gains. Ebix could be in this boat because it's still far off its high.

EBIX
Source: StockCharts.com

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