THE TAIPAN GROUP'S 247PROFITS E-DISPATCH
BALTIMORE, NEW YORK, CHICAGO, BONN, LONDON and PARIS
April 25-28, 2003
Dear Friend,
It's a sobering thought when, at the ripe old age of 34, you're considered to be an elder statesman at your company. But that's exactly what I've become at the Taipan Group. Only Christoph, one of the last founding Taipans still actively involved with the Group, has been here longer.
Since I joined the Taipan team in 1994, I've done many things I'm proud of. In 1999, I worked with Adam Lass to identify and isolate the Fibonacci sequence... that technical indicator which has become the cornerstone of his highly successful WaveStrength analytical system. In 2000, I lured Bryan Bottarelli, then a pimply-faced 23-year-old CBOE trader, into the Taipan fold. Bryan is now Adam's cohort in translating WaveStrength signals into profitable options trades.
Of all the personal success stories, I'm most proud of one technical indicator I developed back in 1997. I called it the Volume Spike Indicator. It's one of those handy little tools that can help you make money independent of where the markets are heading. In fact, it's so simple to understand and apply, you can use it yourself. Let me explain:
***Back in 1997, I enrolled in the Chartered Market Technician (CMT) program at the Market Technicians Association. It was a three-year program, with each year ending in an exhausting four-hour exam. In the third and final year, CMT candidates are required to write, present, and defend a thesis. And the thesis must be a technical indicator developed by the student.
One thesis that has become a standard technical indicator in every Technical Analysis (TA) book and program is John Bollinger's Bollinger Bands. So this isn't a school for halfwits and poetry majors.
With the fame and fortune of Bollinger in mind, I set out to leave a lasting mark on the TA world by developing my own technical indicator.
In 1998, with another colleague of mine, I developed the Volume Spike Indicator. Before I explain it in detail, I should give you a little history on the use of trading volume as a technical indicator.
***Volume is the second oldest technical indicator known to technical analysts. The oldest, as you probably already know, is price action.
Volume is perhaps the most important of the many misunderstood subjects in TA. The primary reason for the misunderstanding centers around the fact that volume can have different meanings at different times.
Many studies have been published on volume and trading. (The most well known is probably Joe Granville's "On Balance Volume" (OBV), which was developed and originally presented in his book, "New Strategy of Daily Stock Market Timing for Maximum Profits." (Don't you just love titles like this?)
Granville attempted to use changes in his OBV indicator as a precursor to pending price changes. The theory is that "smart money can be seen flowing into a stock by a rising OBV. When the public then moves into the stock, both the stock and OBV will surge ahead. By watching the trend of the OBV measure, you can determine if a stock price will trend higher or lower. If OBV is truly a precursor to price action, then with this information you could literally 'front run' price by watching for the trend in OBV."
***Let me state that again so it sinks in: In theory, rising volume (OBV) should allow you to 'front run' a stock about to rally.
When I read this several years ago, my jaw dropped.
But it wasn't until I read Magee and Edwards's bible of TA, "Technical Analysis of Stock Trends," that I realized that, because of its age and simplicity, volume is the most ignored yet probably the most accurate of all technical indicators.
As I started the groundwork for my thesis and technical indicator on volume, the one thing I began to notice was that sharp rises in price were usually preceded by a sharp increase in volume.
This principle is known as "volume leads price."
***The volume increases I was seeing were so sharp, they took on the image of a spike. Hence the name volume spike.
But the more important phenomenon that I noticed was that these volume spikes occurred on no news. In other words, there wasn't a news event to account for the surge in buying.
But what's the relationship between these two variables: 1) stock price and 2) the preceding volume spike?
Another phenomenon I began to confirm was that after a volume spike occurred, a few days later or maybe a week or two later, the company would put out a positive press release. Once the positive press release hit the wire, there was a surge in buying in the company's stock.
As a result, traders who bought during the volume spike were now sitting on a 30%, 50%, sometimes even a 100% profit.
What was going on?
Simple: Insiders were anticipating good news by substantially adding to their stakes in the company, usually without measurable effects on price. The volume spike that occurred was caused by the smart money's buying (à la Joe Granville)... that is, insiders or people who were tipped off by somebody close to the news. They were, in essence, front running the stocks.
A few days or weeks later, positive news would break, sending the stock into the stratosphere.
***This "front running" isn't exactly new. During the heyday of the 1990's bull market, front running on Wall Street was as common as the three-martini lunch.
But the small individual investor was usually left holding the bag, which is why you see so many lawsuits these days filed against big Wall Street firms.
But as Joe Granville argued, you can legally front run stocks without breaking a single law. All you have to do is catch a ride on the coattails of the smart money by following volume...which is public knowledge and these days can be monitored easily through various Internet services.
And that's why I started the Rogue Trader trading service in 1998. Rogue Trader is dedicated to watching for volume spikes. Think of it as a radar screen that constantly watches for stocks exhibiting trading volume 50%, 100%, or 500% higher than their average daily volume.
In the past six months, the Volume Spike Indicator has produced a track record of 23 winners out of 26 recommendations.
In fact, today we took a 29% profit on Avant Immunotherapeutics (AVAN:NASDAQ) after observing a volume spike several weeks ago.
***Now, one of the reasons why the track record has been so golden recently has to do with the quality of the volume spikes. Prior to 2000, my system would pick up dozens of volume spikes per day. Some were good. Some were junk.
With the crackdown of the SEC on insider trading and front running, volume spikes these days are few and far between. But the ones that do get caught by my volume spike screen are rock-solid plays.
This past Wednesday, we flipped out of Ford (F:NYSE) for a 23% profit in five trading days... and immediately bought a US$1.05 stock that experienced a volume spike 1,100% higher than its average daily volume. I'm not kidding, it traded over 2.1 million shares, while its average daily volume is only 175,000 shares.
There was no news whatsoever.
That's how it works.
Sincerely,
Brian Hicks
The Rogue Trader
AI
