Hello Powersurge:
Here's something I've been planing to send you for some time but time is something I don't seem to have much of lately. I've changed it to remove the quotes and tighten up some of the verbiage and of course the charts aren't here, but you should be able to find them on the Internet and check on what the article is saying. Anyway have fun, I though it was rather interesting.
Gary
TRAKING THE TRADING SPREAD CAN REVEAL BULISH PATTERNS
"Investors Business Daily" June 8, 1998 'Investor's Corner'
The trading spread is the price range for a stock during a day or even a week of its HIGHs and LOWs. The natural breathing or expansion and contraction , in a stock's price shows up in its chart. You can see a pattern emerge as a stock moves up over several months and then pulls back and consolidated its gains. Some key things investors should consider are:
A stock's spread pattern during a base.
The close within the spread
Expansion of the spread
Spread following a breakout
Good stocks tend to move up and then consolidate. It's during the basing phase that an investor need to closely watch the range of the trading spread. That can signal if the stock is still acting bullish. Normally you want the daily and weekly trading spread to decrease while a stock forms a sideways basing pattern. That indicates the stock is going through a "calming period" after an advance and that the selling is contained. A decline in trading volume, especially on down days, is good confirmation a stock is calming.
Sapient Corporation showed that pattern during its basing period from mid-July last year until late December. The stock set up a "flat base" between 28 and 25 and eventually broke out Dec. 30, driving ahead to 30. It then surged 93% to 57 7/8 during the next four months. A stock exhibiting a wider-than-normal daily trading spread during a basing phase is suspect. Those patters are called "wide and loose." After hitting its high, Sapient pulled back 36% to 37. It's now trading in a range from 48 to 38, a base twice as wide as its previous consolidation. Investors should keep in mind that its wide swings intraday and intraweek raise a caution flag.
Vantive Corp. shows what a loose base can lead to. The stock rallied from 25 in early March to hit 39 by early April. It traded with wide swings for four weeks, it finally broke down and dropped to 27.
A stock that closes at or near the high of its daily trading spread is acting bullish in most cases. A close near the high of the day, especially with increased volume from the day before, is positive and indicates strong demand. A stock that breads out of a consolidation should show an expansion of its daily trading spread and a close near the high of the day. Dell Computer did just that on its breakout April 21. It broke through resistance at 70 and closed at 74 3/8. Its spread that day ranged from 70 « to 74 7/8 and showed that buyers were overwhelming sellers. The close should be in the top 25% of the trading range to confirm a breakout.
Other stocks that have showed an expansion of their trading spread on a breakout are RCM Technologies Inc. on March 2, Gap Inc. on April 29, LCI International Inc. on Feb 26 and EMC Inc. on April 21. The daily trading spread on EMC's breakout constituted a "gap" move. That means it skipped ahead in price on the tape and is bullish because it shows buyers were very aggressive. In breakouts, follow-throughs are key, the three days after a stock breaks out are crucial and investors should keep a close eye on a new purchase. The daily spread should expand when the stock is moving up and contract when it pulls back. Also, on the wide trading spread days, it should close near its high. Dell did just that and so did RCM. The expansion of the trading range in the direction of the trend validates the breakout.
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