Today I’ve got a new way for you to understand what’s going on in the stock market right now and a look at one of my current favorite stocks that just dipped into its Low Risk Zone.
First, the broad stock market …
Below is a chart of the S&P 500 that you’ve probably never seen before. It shows the price history from late 2008 to today.
What you probably haven’t seen before is the gold colored indicator on the left axis of the chart. It looks like a mountain range stacked on its side.
This indicator is a different way of looking at volume. Most investors are not familiar with it. It’s known as a “volume at price” (VAP) indicator. It shows us how much volume (how many shares were traded) at each price.
Normally volume indicators are along the bottom of a chart, showing us how many shares were traded on a given day. This vertical volume indicator is similar to time-volume indicators. It just shows volume by price instead of volume by time.
I know that it takes a little bit of effort to wrap your head around this new idea but it’s worth it. VAP is a very powerful indicator for determining support and resistance and it’s showing us a lot about what’s going on in the stock market today.
The red rectangles on the chart above correspond to the peaks in price volume as shown by the VAP indicator.
We can see, for example, that a tremendous amount of volume has occurred near the very top of this bull market. A lot of ammunition has been spent by the bulls trying to break through this level to new highs and the bears trying to defend it.
It’s likely to continue to be a very hard slog to ultimately break through to new highs because it has become such a psychologically important level for so many market participants. When, however, the S&P 500 does eventually break out to new highs, you can bet that it will be like a dam breaking. All of that pent up energy will propel the stock market higher.
The second rectangle from the top is highlighting another area of high past price volumes from about 1,830 – 1,870. That’s the area that is being tested right now and from which we’re seeing prices finally bounce hard.
Below 1,830, we’re looking at 1,600 – 1,700 for support and then 1,300 – 1,400.
This chart will likely be a very useful chart to print out and keep handy as the market continues to probe and test various levels of support and resistance throughout 2016.
This week one of my personal favorite stocks, Microsoft (MSFT), dipped into the Low Risk Zone. (In full disclosure, I own Microsoft.) Take a look:
Believe it or not, I’m actually one of those guys that identified with the nerdy “I’m a PC” guy over the super-hip “I’m a Mac” guy.
But that’s not the reason that I own Microsoft. I own it because it has a great brand that I believe to be currently undervalued. I love the changes that Microsoft is making in their business now – focusing on cloud technologies and building their own hardware. I recently bought a Surface Book laptop. It’s a great laptop – unlike anything I’ve seen from the Microsoft / Intel partnership over the years.
I think that Microsoft has nowhere to go but up … and my indicators are supporting my belief.
As I’ve mentioned several times in these pages recently, I’m keeping my powder dry in this market but I’m not yet convinced that the sky is falling. I’m seeking out strong stocks like Microsoft that are performing well and don’t seem to be overextended.
Since I introduced the concept of Volume at Price analysis today, I’ll wrap things up with a VAP chart of Microsoft. The VAP indicator on the left shows that the price area around $45 to $48 is very strong support for Microsoft.
Microsoft dipping into its Low Risk Zone just above very strong price support is an intriguing opportunity for me.
Maybe it will be for you too,
Richard M. Smith, PhD