5 Weekly Warning Signs Before a Stock Breaks its 10 Week MA

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3.  Price Churn

Price churn occurs when a stock fails to make upward price progress on heavy volume.

In other words, there's a lot of effort (volume), but very little results (range expansion) to show for it.

Churning can surface at any time, but when it shows up after an advance, it's a sign that institutional investors are using the mark up in shares to sell into strength.

Remember, stocks tend to come under distribution while they're advancing. 

I like to call this distribution on the advance.

Why does this happen?

Let me quickly explain.

Institutional investors prefer liquidity to sell their stock holdings and there's no better time to sell then when everyone else is buying.

Uptrends provide the perfect opportunity to unload stock to investors who want in on a stock that they may have missed at the beginning of the rally.

Do you now understand why stocks come under distribution while they are moving higher?

Let me show you an example of this on a chart.

Historical Stock Chart Examples 3A & 3B (Price Churn):  Diana Shipping (DSX) 2007

Diana Shipping (DSX) benefited from increased global commodity demand during the latter part of the 2003-2007 Bull Market.

Along with its peers, DryShips (DRYS) and Excel Maritime Carriers (EXM), DSX racked up large gains in a relatively short period of time.

But as we know, all good things must come to an end and DSX was no exception.

For the week ending 11/02/07, DSX closed up 1.9%, but it was on the heaviest volume of its brief, 2+ year trading history (see chart 3A).

That price action showed classic churning behavior because a lot of volume went into lifting the stock higher, but the end result (% gain and range expansion) didn't quite match the effort.

The next week, DSX reversed course and began falling hard (see chart 3B).

DSX would never surpass its 11/02/07 churning week high.

4.  Contracting Range

Contracting range is easy to spot on a bar chart.

In uptrends, it occurs when volume soars and prince range narrows or shrinks.

Like price churn, the heavy volume in contracting range indicates that price is laboring.

However, there is one important difference between price churn and contracting range weeks.

In contracting range weeks, the percentage gain for the week can sometimes look impressive, but relative to the volume it's not positive.

In extended stocks, an increase in volume should come with range expansion, otherwise, there's distribution going on behind the scenes.

Can you see how both price churn and contracting range weeks can hide distribution if you don't use a stock chart?

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