Understanding Price and Volume During Stock Market Sell Offs | Podcast Episode #346

0:07
Hey, I’m Ryan Mallory and this is my Swing Trading the Stock Market podcast. I’m here to teach you how to trade in a complex, ever changing world of finance. Learn what it means to trade profitably and consistently, managing risk, avoiding the pitfalls of trading, and most importantly, to let those winners run wild.

0:25
You can succeed at the stock market, and I’m ready to show you how. Hey everybody, this is Ryan Mallory with Swing Trading the Stock Market. In today’s episode, we’re going to talk about volume and candles, mainly about volume size and candle size, how those two things relate.

0:41
When you see a lot of candle coming in, when you see a really big bodied candle as well, How do those two things interrelate with each other and what does it mean for the charts when you’re trying to interpret them? And so over today’s e-mail, we’ve got a guy that really wants to know what is the correlation here. When I see a candle that’s really strong and then I see an immediate bounce thereafter, we’re gonna call this guy, we’re gonna give him a good Florida redneck name of Jim Bob And Jim Bob writes hey Ryan, we briefly covered this in another episode, but I didn’t quite understand it.

1:12
So when we are watching a chart and there is high volume on a large red candle, does that indicate a lot of selling or are people buying up the dip? I’m asking this because lately as soon as there is a red candle, it bounces a little on the next candle. Sorry if this has already been explained, but I’m just trying to understand volume and market direction a little bit better.

1:31
Straight to the point. Appreciate it Jim Bob. Now, it’s important to remember price moves the most significantly on large volume, especially to the downside. When you start seeing sell offs and there’s not a lot of volume associated to it, I get very skeptical that it could sustain the sell off because there’s not a lot of volume.

1:49
And what that usually means is that there’s not a lot of panic on the tape. There’s not a lot of people that are saying I can’t take this anymore. I’m selling everything or I’m selling that position. There’s not a lot of that going on. People are being very methodical and they’re maybe taking a little bit of profits or they’re just selling a little bit of their position, but they haven’t really lost confidence in the market or a reason to go ahead and completely close out their trades.

2:09
They haven’t suffered a lot of pain yet. And throughout the course of 2023, that’s really what we’ve seen. There’s been a couple of moments and we’ll get to those in just a second. But for the most part, when we have had sell offs, yes, there’s been times where there’s been significant levels of selling, but it can’t be sustained. And when it can’t be sustained, that’s when you get those strong balances, whether it’s the next day, the next 5 minute candle.

2:30
I have friends they’ll look at like the one minute candle and they will get really frustrated because when you’re looking at a one minute candle and you see a big volume sell off and then you see this immediate stair stepping right back up, you see it on the five minute candle as well all the time. Especially I would say over the last three plus months, 4 plus months going back to when the banking crisis started happening with the regional banks and then that got settled when the Federal Reserve bailed them all out.

2:55
Then you started seeing that same mentality where you would get a sell off and you think okay, the market’s going to go retest those March lows and you don’t. All you see is an immediate stair stepping right back up to the the highs of the day. And it could get really frustrating, especially when you saw a gap down and you spent the rest of the day pushing just like nothing ever bad happened if we were just marching right back higher or you get a bad CPI report and you’re thinking okay, inflation is running hot.

3:19
We’re going to sell off two 3% today. And you initially do you sell off 2% and then you simply see price go all the way right back up to the highs today, go green and go beyond that. That’s incredibly frustrating for a trader. But you’ll notice a lot of times the volume doesn’t really match.

3:36
You’ll see a lot of volume come in immediately and then it just tapers off. It doesn’t exist anymore. And then that’s where the bounce starts to happen. And so to Jim Bob’s question here is that when you see a large red body candle with a lot of volume, does that mean that everybody’s just buying the dip on that large body candle?

3:54
No, that’s actually legit selling. The amount of selling and the volume in that candle bar is what’s causing the sell off to happen when you get that big red body candle. Now it’s also important to remember too that when you see a lot of selling, you see a big red body candle.

4:11
It doesn’t necessarily mean there was more sell orders because you got to match a seller with a buyer. You’re just not buying from somebody imaginary that doesn’t exist. You have to match them up. But what it does mean if somebody comes in with a market order at 10,000 shares to sell stock ABC at 100 and the buyers that are available to absorb that market order, you only have 1000 shares at 100 and then maybe you go down to it and this is just an example.

4:37
And then you have another thousand at 99 and then maybe it gets a lot more scarce. And then all of a sudden at 9850, there’s only 100 people there that can absorb that kind of order. So all of a sudden you get this big sell order at the market, which means they’re willing to sell at the bid price.

4:54
And all of a sudden all these bids and all these orders that are underneath the existing price, there’s not enough shares to absorb that whole order and it causes it to go back down. That’s why you see so many of these pump and dumps happen because when people are buying these pump and dumps and they’re getting into the stock and it seems like it’s just going to go to the moon forever, it takes one big buyer that might have gotten in at the very beginning saying, and you know what, I’m done.

5:16
I’ve made my millions off of this pump and dump, and I’m going to get out of this trade. You’ve seen it with GameStop, you’ve seen it with Bed, Bath and Beyond. You’ve seen with AM C You’ve seen it with all these crabby stocks, Carvana. And all of a sudden somebody decides to start selling. And they might be selling not just like 100 shares like with a lot of the people were buying on the way up.

5:35
They had a lot of shares to begin with and then they’re liquidating and there’s not enough buyers to absorb all of that selling that’s taking place. And so you may see the stock go even though it went up 50% the day before and 75% the day before that and 20% the day before that.

5:51
When they start selling at the top, there is not enough buy orders. There is not enough people willing to buy and absorb those shares at that current price to where it keeps knocking it down more and more levels. And so going back to the original topic here about big volume and red candle bars that are very large, it’s not necessarily that there’s more sellers than buyers.

6:10
There’s not enough buyers with enough shares to absorb maybe just one seller. It can be just one seller, Maybe it’s Goldman Sachs or a big bank that’s selling. And you got a bazillion of little small retail buyers that cannot absorb all the selling that that one entity is doing. And so you see a drastic sell off in the stock or in the market or something, whatever is being traded, but there’s an overwhelming amount of shares that can’t be absorbed by the buyers.

6:37
You look at intraday activity and it’s important to remember how a lot of your intraday action happens. When is the time that the market is the most volatile? It’s going to be between 9:30 AM Eastern Time and about 10:00 AM Eastern Time. You can maybe even extend it out to 10:30, but that is that is a very volatile moment in time for the market.

6:55
The other period is usually from 3:00 to 4:00 PM Eastern Time or the final hour of trading or on both ends of the extreme. You got the 1st 30 minutes that’s very volatile and the last 30 minutes of trading that can be very volatile. But what does both of those time periods have that maybe 11:00 AM Eastern Time to 2:00 PM Eastern Time or to 3:00 PM Eastern Time does not have it’s volume.

7:18
Volume tends to be the highest at the beginning and the end of the day. That’s why you get the biggest price swings in the day. That’s also why I don’t trade the 1st 30 minutes of trading because there are so much volume, there’s so much price, swing action, volatility, all that stuff. I don’t want nothing to do with it. I want to see price settle down some so I can get a true feel for what the market intends to do that day and what the stock that I might be looking to trade in decides it wants to do that day as well.

7:42
And then as you get closer to that lunch time, there’s hardly any volume there. People are going off. They’re meeting with clients or they’re going to get lunch at, you know, whatever cafe they go to on Wall Street. And then they come back and towards the end of the day, they start putting in their orders. At the end of the day. I do a lot of my selling at the end of the day as well.

7:57
When I’ve been in a position and I’m ready to take a third off and I’ve let the stock run its course throughout the day, I’ll say okay, time to go ahead and take some shares off. Maybe it creates A volatility with my order and a whole bunch of other people that are ordering and maybe wanting to sell out of their stocks that day as well. And so your volume’s picking up towards the end of the day when it was actually pretty dead during the middle of the day.

8:16
But what is not dead is swingtradingthestockmarket.com. I always plug this in every one of my episodes because it’s important. If you’re watching on YouTube, you can click the button just below by clicking join, you’ll get all my stock market research each and every day. If you’re listening to it on a podcast platform like Apple or Spotify, you just go to swingtradeinthe-stockmarket.com and with it you’re going to get my research on everything that I do each day.

8:38
That’s going to include all the indices. That’s the SP500, the Russell, the NASDAQ, the VIX. I look at all that stuff. I send out videos throughout the course of the day. Big tech stocks as well. Really cool feature that I go through all the biggest tech players and provide the technical analysis there, as well as providing my daily and weekly watch list that I’m watching most closely and some of the stocks that intrigue me the most from a watch list that I’m curating from.

9:01
So make sure to check that out. swingtradingthestockmarket.com Now, other periods that you see where there’s a lot of volatility, sometimes it’s just in futures before the market opens. That’s what your economic reports, that’s your CPI report your unemployment that can be your GDP number. That can be a whole host of things that can be, you know, some Fed talk that’s happening before the market opens.

9:20
Speaking of the feds, you also had the FOMC every six weeks, typically at 2:00 PM, followed by a presser at 2:30 PM Eastern Time, which I wish they would just go ahead and dump the presser altogether. That is just such a absolute clown show when they do those 2:30 PM pressers, That’s Eastern Time too, by the way.

9:36
But that creates a lot of volatility. Those economic reports create a lot of volatility. Also, post market, you can get some crazy amounts of volume even just in the NASDAQ 100 from the Apple earnings or from Google earnings or big tech stocks. When they’re reporting or in the individual stocks themselves or if they’re reporting in the morning, like what you see with a lot of the banks.

9:57
Yeah, that’ll create some volatility for sure among those individual banks. And if you have something like United Healthcare, which is the largest stock currently on the Dow Jones Industrial, when they report earnings, that’s going to affect the Dow Jones because it’s such a big price weighted influence on the Dow. And with these big market volatility moments, you’re going to have a lot of volume, you’re going to have a lot of big price swings.

10:18
That’s going to be where you see a lot of your biggest moves of the day is when there’s a lot of volume accompanying a big news event. Couple weeks ago, I went into EA Sports. The EA was the stock symbol for I got into. It really didn’t do much. In fact, it started fading a little bit. I said I’m gonna go ahead and just close out this trade. I took like A1 plus percent loss on the trade, not big at all.

10:36
It was kept very minimal, but the next day didn’t do much. It opened up a little bit higher, but it didn’t do much. It was just trading sideways. But then all of a sudden there was news related to the Microsoft acquisition of one of its competitors and the stock just went straight through the roof.

10:55
I think it went up like 5% out of nowhere. Why? Because there was volume, There was an influx of people buying off of the positive news. There might have been more sellers that the amount of buying in terms of shares was so big that it absorbed all the selling pressure that there was outstanding. And all of a sudden the stock shot up 5%. And why did that happen was because of the news, because there was volume that accompanied the news and it was a lot of shares that were trying to get purchased and there wasn’t enough sellers to absorb all of it to keep the price where it was.

11:19
So the price had to go higher because the buyers were willing to keep buying it at higher levels and absorb those shares at a higher price. If you go and look at the banking crisis from earlier this year back in March, you saw there was a lot of some pretty much the highest volume levels that we saw all year long. Why was was that the case?

11:36
Well, that was also the period that we’ve seen some of the biggest selling on. The year was during that March banking crisis when we thought how many regional banks are going to go out of business here, Is the financial system going to collapse? And as a result, you saw some legitimate panic selling that bottomed out around I think it was March 13th is when when the Fed bailed out everybody and then it reversed course.

11:54
And we really haven’t looked back since then because they took that risk off the table, the Fed did. But when the market was selling off, there was legitimate panic. If you look at the summer volume so far this year, yeah, markets up this, this summer, it’s been up all year long really. But over the summer time, it has consistently marched higher and it’s been doing it on low volume.

12:13
And that’s very common for the market to be able to drift higher when there’s not a lot of volatility that it tracks more buyers. But when the sellers come and they come in mass, there’s usually a lot of wine that’s associated with that and it drives prices lower. So when you get a sell off and there’s not a lot of volume to it, that’s a reason to be skeptical.

12:31
And that’s why you’ve seen over the course of this year here in 2023, so many people getting burned on the short side when there was a one day sell off. But then the following day there was no follow through because there was no volume to the downside. All that volume was expelled in just one day, but they didn’t have enough to continue that sell off And so the more price goes right back up on low volume.

12:53
So to summarize, volume is very important when you’re trying to get price movements to the downside. When you see these large bodied red candles, you want to see volume accompanying it. And if you’re not getting that volume and you’re starting to see where price is bouncing back with these small little green candles but you’re not getting that follow through, that’s a reason to be skeptical.

13:11
When you’re not seeing volume accompanying moves to the downside that are big, that’s a reason to be skeptical and that it’s very much in the market’s capacity to be able to push the market higher on very low volume. We’ve seen that through the course of this year. I’ve seen a plenty of times in years past, especially in the summertime.

13:28
A lot of people think summertimes, you know, some of the worst trading days that you can trade. But often times that because it has such low volume and low participation, it just kind of meanders higher, dress higher and all of a sudden you realize, oh man, markets rallied a couple 100 points this summer. Who knew? So if you enjoyed this podcast episode, I would encourage you to like and subscribe on YouTube whether or not you want to listen to it on YouTube or not.

13:48
I can subscribe just because it helps me out on the channel. And if you’re watching it on a podcasting platform, make sure to leave a 5 star review. Keep sending me your emails. ryan@shareplanner.com. I’m using them all. Keep sending them to me. Thank you guys and God bless. Thanks for listening to my podcast Swing Trading the Stock Market.

14:06
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14:24
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14:41
All the best to you and I look forward to trading with you soon.