Understanding Volume:

Friday 12 February 2010:

Today is an interesting day to look at the Kimber (KBX) chart at 11:00 a.m. The price, and therefore the demand part of the supply and demand equation, appears to have not changed at all. Nothing could be further form the truth. In the morning, increased volume came in and pushed the price up to 1.12. Then, later in the morning a single low volume trade went off at 1.07 which to the untrained eye might appear to have “wiped out” all the morning’s gains. Thus we can see the danger of examining price movements alone without reference to volume. Marketmakers in the stock, i.e. those trying to make the stock appear less attractive than it otherwise would be, can and will do things to manipulate the price in order to frighten or confuse the uninformed.

Look at the volume of that last trade that went off at 1.07. Two hundred shares, on a day where 100,000 shares have changed hands. That marketmaker wants to discourage you, to either keep you from buying more, or worse, scare you out so he can eventually pick up your shares at a lower price. That’s how he makes money. You are not a marketmaker, however. You make your money by understanding the story, buying and holding. Those two hundred shares he probably sold to himself, one account trading to another at a low price. Maybe he just sold them to a friend. He doesn’t care about losing a few dollars on the trade. He will gain it all back and more with the advantage he gains by playing on investor psychology. His tactics keep other people out of the market for longer than they normally would stay out and buys him more of that most precious commodity: time.

So here’s today’s message: It’s the same message I’ve be preaching all along. Understand the story; take your position, and sit and wait for the price to match the story. Don’t panic. Don’t get shaken out, and don’t let these small-volume trades fool you. The houses in a neighborhood might all be priced at $300,000. One guy might get into trouble financially and have to make a distressed sale at $200,000. That doesn’t mean all the houses in that neighborhood are then worth $200,000. It’s a price change based on extraordinary factors, and it doesn’t necessarily reflect the reality of the underlying market. Once again, it all depends on volume. If six or seven houses in the neighborhood start selling for $200,000, that’s different story. Understand the story. Arm yourself with understanding, and practice and learn patience. All the best, Bull