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Thursday, May 21, 2009

VOLUME TELLS THE TRUTH : MUST READ

Eye on Volume: Another Look at a Strong Indicator

Keep an eye on volume, it can lead to big-time profit opportunity. Or it can save you from getting in at the top. A look at Intrepid Potash (NYSE:IPI) proves its worth.

On a day when the market is having a tough time finding the guts to make a significant move in either direction, there is a surprising amount of stocks deviating from their normal volume patterns.

Continuing with my thoughts on volume from yesterday and the indicator’s strong ability to predict future action, I thought I would take a look at Intrepid Potash (NYSE:IPI).

The stock’s trading volume is roughly about 30% higher than average today.

What does it mean?

At first glance, the activity appears bullish. Shares are in positive territory; meaning buyers must outnumber sellers.

But digging a bit further, it appears the majority of the strong buying activity came early this morning, a continuation of yesterday’s rally. Once the buying slowed down, few investors were willing to step in at the intra-day highs around the $32 level.

Trading cooled off and so did share price.

The volume activity gives us a potential glimpse of things to come. Potash, used heavily in the agriculture industry, was significantly discounted as the global economy screeched to a halt last winter. But now that a light is starting to appear at the end of the tunnel, investors are climbing back into stocks. Investors are surprising optimistic about potash and its demand.

Volume tells the truth

Most indications show the market is overly bullish on the commodity. It appears potash-related positions are due for a drop.

There is one volume-related indicator in particular you should know about: the number of shares sold by insiders.

These folks know the company the best. They know the potash market, its demand and they have a strong feel for what’s ahead. So when I suddenly see insider selling ramp up, it is a surefire clue to pay attention.

The fact that an Intrepid Potash director reported unloading 800,000 shares last week may not be a perfect indication of a drop in share price to come, but it is certainly a glaring sign warning investors to keep alert.

Of course, no good investor will ever buy or sell a stock based merely on a single day’s worth of volume history, but unusual activity is always a great place to start your screening process.

With Intrepid Potash, volume tells us shares may be reaching their near-term peak and are poised for a drop. At least one insider believes now is the time to sell.

Remember, those volume statistics are there for a reason. Use them to your advantage.

Source: Eye on Volume: Another Look at a Strong Indicator

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