Study Volume In Bases To Gauge Buying

Look for evidence of institutional buying when a stock is forming a base. That way, you know the big guns are with you.

To get a better sense of whether institutional buyers have the upper hand, look for bases that have more up weeks on above-average volume than down weeks on high volume.

Institutional investors -- mutual funds, hedge funds, pensions, for example -- dominate the market and can move stocks substantially higher once they decide to add a stock to their portfolios.

Armed with billions of dollars, it can take institutions weeks or months to get fully established in a position.

For instance, take a fund with $1 billion in assets that wants to put 1% into a certain stock that's trading at 25 a share. That's $10 million, which would equal 400,000 shares.

The fund can't buy all the shares it needs in a single session or even several days without pushing up prices and driving up its own cost.

Therefore, it has to spread out its acquisition over a period of time. That drawn-out demand will be reflected in price and volume charts.

Finding stocks with lots of accumulation requires a study of weekly charts.

These longer-term graphs give you a bigger picture of the supply and demand situation with less of the noise captured in a daily chart.

Once you've located a pattern, count the number of up weeks on above-average trade along with the down weeks.

Using IBD Charts at investors.com, the average volume is plotted with a thin red line that runs across the volume bars.

Blue price and volume bars represent higher closes. Down weeks are shown in pink.

Keep in mind that a down week in which the stock recovers most of its loss, closing in the upper part of its weekly price range, is a sign of accumulation, too. Most successful bases have a higher number of accumulation weeks than down weeks on heavy trading.

In December, Comtech Telecomunications (NasdaqGS: - ) started correcting. On the left side of its base, only one of the eight down weeks took place on above-average turnover. On the right side of the base, there were three up weeks on big volume.

In a more recent example, DealerTrack Holdings (NasdaqGM: - ) ramped up to an all-time high in July (point 1).

The provider of systems that link auto dealers with financing companies then consolidated over the next 10 weeks, swinging above and below the 10-week moving average.

Half of those weeks in the pattern were down weeks. However, only two of them were on heavy trade, and only slightly above average (point 2 )at that.

The base also had four advancing weeks on big turnover (point 3). On a relative basis, volume was a lot bigger on the up weeks.

DealerTrack broke out on Sept.24, clearing a 40.84 buy point. It has gained about 17% since.