“For the best prospects, do a price and volume check of each week within the stock’s base to help you conclude if the stock is showing sound accumulation or too many price and volume defects. Next, do a fundamental analysis checking for excellent earnings, sales and return on equity.” – William J. O’Neil, MarketSmith Founder
Winning stocks typically start rising in heavy volumes before they move onto new highs. The strong volume increases indicate that mutual funds and other big funds are actively taking positions.
It usually takes such investors weeks or even months to accumulate the many thousands or even millions of shares that they need to fill out their positions. MarketSmith’s proprietary rating, Buyer Demand Rating, which analyzes a stock’s price and volume trends over the prior 13 weeks, is an indicator of this activity.
A rating of “A” or “B” indicates that funds are buying, or “accumulating,” the stock. A “C” rating is neutral, and a “D” or “E” indicates net selling, or “distribution.”
Look at a stock’s daily and weekly charts to see if the stock is rising in heavy volume. On the breakout day, the volume should be more than 40% above average, which would indicate big fund buying. You can confirm this action against the Buyer Demand Rating too.
You can view the Buyer Demand Rating on top of the chart of each individual stock in the MarketSmith India App.
Before buying any stock, it is advised to examine the stock using the Buyer Demand Rating. This rating can be used along with other tools such as the Master Score, which combines major proprietary ratings into one, including the Buyer Demand, Earnings per Share, and Price Strength ratings.
As always, make sure that the overall market is in a Confirmed Uptrend and the stock is at a buy point in a properly formed base before jumping in.
Also, do not wait for the A/D Rating to fall to D or E before selling. Analyze the stock’s daily and weekly chart action before deciding whether to hold or sell. Pullbacks in below-average volumes are usually not a concern, but heavy-volume drops could mean that the institutional investors are bailing out.
Let us have a closer look at a couple of examples from the current holdings of our Model Portfolio.
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