When a stock hits a new high in low , readers often see one of two descriptions in IBD.
"A new high in low volume is a sell sign," readers are told. Other times, it's noted that "you can't expect a new high in strong volume every day.
Does this sound contradictory
In most cases, the difference between the first description and the second description is context.
A true sell sign is sort of like a raccoon in the attic. If you have a raccoon in the attic, that means you probably have baby raccoons in the attic. Ignore the problems, and the racket and the damage will grow.
Other sell signs are less urgent.
So, how do you distinguish between the lesser and the greater sell signs
One way to determine the nature of a sell sign is to look closely at the stock for other problems. A troubled stock seldom has just one problem. In most cases, a thorough examination of a troubled stock will find other problems that may have slipped your attention until now.
This means that if you spot a new high in low volume, you should study the chart for earlier signs of trouble.
Let's look at Precision Castparts (PCP) in late 2007 to early 2008. Suppose you bought shares when the stock broke out of a cup-with-handle base on Oct. 24, 2006, clearing a 67.39 .
The stock more than doubled in the next 11 months. But on Sept. 21, 2007, the maker of complex metal components hit a in mildly below-average trade. (1) Was the new high in low volume worrisome, or not such a big deal? This was the time to look at the chart more closely.
The stock had been consolidating since August 2007, but the pattern was late-stage and sloppy. Two weeks on the left side showed 25 and 26 point ranges between the highs and the lows (best seen on a weekly chart).
These were the largest weekly point spreads in the entire run, which constituted sell signs.
If an investor didn't sell, he or she at least should have been watching for more sell signs. They came. The stock made in below-average volume on Sept. 24, 25 and 26. (2) More sloppy action followed until the stock eventually cut under its 200-day moving average, which is usually a late sell sign. (3) From there, the stock lopped off an additional 30 points. By March 2008, it fell 42% from its 160.73 peak.