Last week, I published a screen that I use to find winning stocks with upward price momentum amid heavier trading activity (bullish). (Primarily, it looks for stocks that have increased each day for the last 3 days with an increase in the accompanying volume for each of the last 3 days as well.)

I’m talking about using price and volume to know when to pull profits and cut your losses.

Look at your stocks. Are they moving higher convincingly on growing volume or are they marking higher prices on diminishing volume?

This is important since volume is supposed to follow price.

If the stocks on your radar are moving higher, but without greater investor interest, it can often mean pullback is in the near offing.

An analogy that someone told me illustrates this clearly.

Imagine you have a water hose and a ball. If you placed the ball of top of the water hose and sprayed it upwards, the ball would be lifted by the stream of water being sprayed out. The more water pressure you give it, the higher the ball will go. But once you start easing up on the water pressure, the ball will stop moving higher and eventually start falling as the water pressure diminishes.

And that’s kind of what happens with stocks too. The more buying pressure there is, the higher it’ll go. But once the buying pressure eases up, it often means a pullback is in store. The pullback can be an ordinary retracement as new buyers catch their breath or it could be a trend-changing event. So pay attention to what the volume is telling you and be alert.

A screen for helping you weed out the weak from the strong can be as simple as looking for 3 days (or more) of higher prices while each day it’s registering less buying pressure (lower volume).

The parameters are:

Recent Price > Price 1 Day Ago (Recent > Recent-1D)
Price 1 Day Ago > Price 2 Days Ago (Recent-1D > Recent-2D)
Price 2 Days Ago > Price 3 Days Ago (Recent-2D > Recent-3D)

Recent Volume Volume 1 Day Ago Volume 2 Days Ago Here’s 3 that fit this criteria as of the end of business on Fri., 3/11/05;

ANST Ansoft Corporation
( PETM - Snapshot Report ) PETsMART, Inc.
WSBA Western Sierra Bancorp

There are many more stocks that appear on that list too. If your stocks show up on it, pay close attention. They could be in store for a direction change.

You can also look for three days down (or unchanged) with increasing volume. Lots of action with no upside progress can often be a sign of distribution (people selling off their stock), or people getting short.

The parameters are:

Recent Price Price 1 Day Ago Price 2 Days Ago Recent Volume > Volume 1 Day Ago (Recent > Recent-1D)
Volume 1 Day Ago > Volume 2 Days Ago (Recent-1D > Recent-2D)
Volume 2 Days Ago > Volume 3 Days Ago (Recent-2D > Recent-3D)

Here’s 3 that fit this example as of the end of business on Fri. 3/11/05;

( PVR - Analyst Report ) Penn Virginia Resource Partners, L.P.
( STJ - Analyst Report ) St. Jude Medical, Inc.
( TRC ) Tejon Ranch Co.

You may even want to check for stocks with big price drops on much larger than average volume. If the price falls by let’s say a $1 for instance on 20% more volume than average, that can also be your queue that things may be changing. Again, since volume in general should follow the price, a big price drop on increasing volume could be foreshadowing even lower prices to come.

The parameters are:

Recent Price - Price 1 Day Ago >= $1
Recent Daily Volume >= 1.2x (20%) 20 Day Average Volume

Such as: (as of the end of business on Fri. 3/11/05);

( OSTK - Snapshot Report ) Overstock.com, Inc.
( WCC - Analyst Report ) Wesco International, Inc.
ZOLL ZOLL Medical Corporation

There are also many other ways to use price and volume as an indicator of a stock’s future direction. But by simply applying these screens to your stocks, you could keep yourself out ‘suckers rallies’, exit major tops sooner, and lock in hard earned profits on your winners before the market takes it away.

(By the way, these strategies and many more come loaded with the program.)

See for yourself and put your own stocks to the test.

Historical daily volumes (and even prices) aren’t available in all screeners, but they are available in the Research Wizard. (Not to mention 650 other items too). Sign up now for your 2 week FREE trial to the Research Wizard and see how easy it is to make better trading decisions today. Click here and find out how .