Volatility and Volume

Whenever you see increasing volume in a stock with a resulting chart upswing or downturn, that is the time to buy or sell depending on the chart direction. The volume increase I am talking about is five to ten times the normal volume. The volume peaks will sometimes be so high that it looks like a skyscraper rising in a desert.

A classic example of this occurred in August of 2011 when Congress was in a terrible debate over the debt ceiling limit. XIV, the inverse volatility index ETF signaled that tremendous volatility was on the way. The average volume was less than 5 million shares per day prior to its explosive sudden change. XIV first started jumping up around 20 million shares of volume and eventually hit around 30 million shares of volume a couple of times. During this high volume period, the stock price dropped over 50%. If you had sold when the volume first spiked high, you would have only lost a little money versus a lot of money later on.

Whether you owned XIV or not during the August-September 2011 bear market raid, this volatility situation affected nearly all stocks. Even if you don't want to own XIV, it will be very beneficial if you put it on your watch list because it can be a warning signal to sell your favorite stocks in other sectors before you lose a lot of money. For example, ERX, the 3X energy bull ETF lost over 50% in this volatile time also. So, you can save yourself a lot of grief and money if you pay attention to increasing volume in a volatility index like XIV.