I have been mentioning how the volume for stocks has been healthy in my recent posts. While I did try and explain what I meant by this concept, I always learn better with an example so here is one.

Here we have a stock with a very steady average volume level. Very easily you can pick out three days where the volume spiked. The day that I have pointed out on the chart will be the one I analyze.

On this day SII gapped down to finish down 6.7% so normal thoughts would be “this stock took a huge hit and fell more than double the normal price move so the volume, while ultra-high, is still fitting.” This is at least what I thought before learning more about VSA.

The correct way to look at this is to ignore the gap and only use the actual range to analyze the move. Once you do that, it shifts the analysis from normal volume to excessive volume.

The next step is to not just to conclusions or predictions. All we know is that the professionals were active and that when the market is down on excessive volume, strength usually follows. After we wait and see what happens the next day, we know that there was demand in the excessive volume and that the professionals are bullish on this stock.

The rest is history. The stock has rallied over 30% and even had a good looking breakout today.