If you remember one thing from your economics class, let it be the law of supply and demand. That key principle is at the heart of the S in .
Knowing it can help you tremendously in the stock market.
A company can have glowing earnings and sales and its stock may be forming, say, a . But if no big buyers step in, the stock will not get very far.
Just like prices for gas, groceries or just about everything, stocks are also governed by supply and demand. For example, if there are only a small quantity of oranges and big demand for them, you can bet on high prices. On the flip side, if there's a bumper crop of oranges, prices will likely be dirt cheap.
In the market, stocks of mega-cap companies with billions of shares outstanding are tougher to move than one with fewer shares outstanding. With a float of 1.48 billion shares, Home Depot (HD) requires much more money to move in price than Lumber Liquidators (LL), whose float is 25 million shares. If all factors are equal, investors should buy the stock with the smaller number of shares outstanding.
The minicharts found in features such as Stock Spotlight, the IBD 50 and Sector Leaders Charts, feature a stock's float, or the total readily tradable shares.
In order to gauge the supply and demand situation in stocks, investors should focus primarily on daily and weekly price and action. Those bars in the upper and lower panes of tell you whether demand is outstripping supply or vice versa. Stocks that move up in double or triple its average daily turnover, are being bought by institutions such as hedge funds and mutual funds. On the flip side, a stock that sells off in heavy trade is being unloaded by the pros.
It's critical to see volume come in at key technical events, such as breakouts or rebounds off the 10-week moving average.
When a stock breaks out of a base, you want evidence that professionals are with you. Therefore, volume should be at a minimum 40% above its daily average. Breakouts in weak volume are suspect.
British chip designer ARM Holdings (ARMH) has been on a tear since busting out of a cup-with-handle base in October. The stock gapped past a 29.29 Oct. 23 in more than triple its average trade.
ARM's weekly volume was double its average 1, showing heavy demand for shares. It has jumped 50% and has yet to test its 10-week moving average.