I have a couple of trading styles that I like to use for buying or selling equities that are coming off of lows or highs. One is to buy tests of previous lows and the other is to buy retests of high-volume breakouts. The key to both strategies is to observe the volume of the test.
Ideally you want to see volume contracting as the price moves into the retest level and also to be much lower than what traded at the comparison level. As is typical with using volume, the signals can be subjective.
The technique requires experience and proper risk control.
I like to use volume to help determine the proper stop points once I’ve entered the trade. What I do is to look back on the chart and find previous high-volume days and assume that those days will act as support. From those support levels I can place my stop on the other side of those trading levels.
Let’s look at the current chart for CCJ.
I initiated a trade in Cameco back in October 2013. This was a classic setup of a test of a prior low on lower volume. The previous trade is labeled and, as you can see, it yielded a nice 21% gain over the course of several months. As Cameco traded higher and higher I decided to exit the equity as it was bouncing into previous swing highs in January 2014. Notice that Cameco pulled back to the $20 level and stopped – it then drifted little higher and had a huge high-volume breakout (labeled). Once that happened, I was not worried about chasing the stock higher, I was more interested in watching it pullback to that high-volume breakout level for test that could serve as a potential by point, which is the setup that I’m showing here.
I will be looking to buy Cameco as long as the price pulls into 22.08 on light volume. Notice I have also marked down to stop levels, one at 20.73 and the other at 19.91. I’ve highlighted to different levels right now because I do not know how hard that price will move into 22.11 buy level. I might choose to use one or both it just depends on the price and volume behavior. It’s just too early to know at the moment.
Things can change quickly!
The most important thing is to keep your eye on volume and make sure it is shrinking as it trades into the breakout level. You also want to see the equity trade with lower volume as it actually hits that all-important high-volume breakout level. If for any reason the volume increases and the price pushes lower, stop, take a step back and reassess the trade. This plan can change at any time and is not set in stone. This is not a recommendation. You need to be responsible for your own trades. I just wanted to point out one of my favorite setups.