Here's a close
look at the turnover of a stock's float, based on
an idea from the works of WD Gann, that reveals
some dramatic patterns and expands the definition
of a base or consolidation zone.
By Steve Woods
and Jan Arps
The floating supply of
shares--or simply, float-- is all the shares
actually available for trading by the public that
are not owned by the company's management. This
number can be incorporated into an understanding
of the direct relationship between the stock price
and its volume of shares traded. This is easily
seen when a backward cumulative count of the
volume is studied in relation to a stock's
floating supply of shares. What emerges from this
analysis are price-volume patterns that clearly
show stocks forming bottoms, bases in a rising
trend, and tops, as well as giving buy and sell
signals. To understand this relationship between
price and volume and see its powerful
implications, one must understand the term float
analysis.
TURNOVER
The turnover of the float is the
approximate time it takes for the float to change
ownership. For example, if a stock's float has 50
million shares actively trading and the volume for
the last four weeks was exactly 50 million shares,
then the float's turnover would be a four-week
span starting from the current date and going back
to the day when a cumulative total of the volume
equaled 50 million shares.
Note that the turnover of the
float is a hypothetical term and not precise. We
can never know exactly when a complete turnover of
shares traded has occurred because we cannot know
the intentions of the market participants. Some
long-term investors may hold onto a stock through
any and all circumstances, while some short-term
traders may buy and sell several times during the
time it takes for the float to go through one
hypothetical turnover. This does not deter us from
analyzing the turnover of the float, however,
because the patterns that arise from such a study
show up so often and speak loudly and clearly for
themselves.
There are vast differences
between stocks when it comes to float analysis.
Some stocks with a small float may take months or
years to go through one complete turnover, while
other stocks with large floats may have a rapid
turnover in a matter of days. Some stocks may have
a turnover lasting several months and then come
under heavy accumulation and have quick turnovers
of just a few days.
The Woods Cumulative-Volume
Float Indicator (WCVFI), a method I designed in
collaboration with Jan Arps to track the turnover
of the float, is based on a cumulative total of
the volume by a simple backward count. The idea
for creating this indicator came from the renowned
speculator of the 1920's WD Gann. In Truth of the
Stock Tape, Gann stated that it was important to
study a stock's volume in relation to the number
of shares actual being traded. Further, he added
that watching how rapidly the float traded was
also important.
THE INDICATOR
To track the float turnover, you
need a source for the float numbers. I use two
publications on which to base my calculations: the
Investor's Business Daily newspaper and the Daily
Graphs charting service. For my work, I used Omega
Research's charting software, SuperCharts.
Here's how the WCVFI works. The
float is a variable input value that must be
entered for each different stock under
consideration. Starting on any given day and
working backward, the current day's volume is
added to the previous day's volume and adds that
to the next previous day's volume and so on. As
each volume number from the past is added
cumulatively, the computer compares the running
total with that particular stock's float. When the
cumulative total is equal to or greater than the
float, a dot is placed above that particular bar
on the chart.
Then two horizontal lines are
plotted on the chart. The top line shows the
highest price reached during the backward count,
and the bottom line, the lowest price. These lines
serve as trigger lines for the buy and sell
signals. When the stock's price goes through the
top line it gives a buy signal, and when it goes
through the bottom line it gives a sell signal.
The lines extend backward from the starting date
to the bar, where the float has gone through one
complete turnover.
Some stocks with a small float
may take months or years to go through one
complete turnover, while other stocks with large
floats may have a rapid turnover in a matter of
days.
The program is set up to start
counting backward from any date entered for
historical studies or set for the present date for constant updates. If a stock's price is
rising day after day, the program gives buy
signals each time the price goes through the line
set from the previous day's highest price reached.
Looking at stocks reveals four patterns that occur
often.
BOTTOM PATTERNS
Tracking the turnover of the
float allows even a casual look to produce
interesting results. The first pattern commonly
seen is with stock prices that have had long
downtrends, but then turn around and head back up.
Further, right at the bottom, the stocks go
through one complete turnover of the float which I
call a turnover base.
Look at Jones Medical Industries
(JMED) shown in Figure 1. From late July 1994 to
April 1995, the stock formed a sideways
turnover-base pattern. During this 38-week period,
all of the available shares for trading went
through one complete turnover.
Figure 1: Jones Medical
Industries (JMED). Here, the stock formed a
38-week bottom that corresponded exactly with the
turnover of its float.
Some group of buyers recognized
it as a bargain and bought all the shares they
could between the $4 to $6 level. After all the
shares were accumulated and tightly held, supply
and demand began to favor rising prices. In the
middle of April, the price broke above the top
line of the WCVFI and gave a strong buy signal.
In the next five months, the
stock went from the $6 range to the $11 range.
This pattern of stocks going through one complete
turnover right before their prices rise is not
uncommon. Other examples to study that follow the
same pattern are Idec Pharmaceutical Corp. (IDPH)
presented in Figure 2 and Greyhound Lines (BUS) in
Figure 3.
Figure 2: Idec Pharmaceutical
Corp. (IDPH). Just before breaking out in the
third week in February 1995, Idec Pharmaceutical
Corp. completed a turnover base that lasted 25
weeks.
Figure 3: Greyhound Lines (BUS).
Here, a complete turnover of Greyhound's float
ended with a breakout above its top float line,
giving a buy signal in the last week of March
1995.
UPTREND-BASING PATTERNS
The second pattern often seen in
Float Analysis™ occurs in stocks that have been
in an UPTREND but go sideways for a time before
heading higher. This UPTREND-basing pattern often
lasts for one complete turnover of the float--once
again a turnover base. Orthologic Corp. (OLGC)
exhibited in Figure 4 shows an example of an
UPTREND turnover base. In the 15-week sideways
price action from August to November 1995, 9.2
million shares were traded in exact correspondence
to its float. When the price broke out of this
base a buy signal was given, and the stock price
continued its upward move.
Other examples of stocks that
formed a turnover base and then broke out on the
upside include PC Quote (PQT), presented in Figure
5, and Zoltek Companies (ZOLT), displayed in
Figure 6. In each case, the owners who bought
earlier sold to a new group of investors who were
convinced that the stock was still undervalued and
would head higher. Once all the shares changed
hands and were tightly held, supply and demand
again favored rising prices.
Figure 4: Orthologic Corp. (OLGC).
During Orthologic Corp.'s price ascent there was a
15-week sideways base that corresponded exactly
with the turnover of its float.
Figure 5: PC Quote (PQT). The
cumulative volume total during the 60-day sideways
action corresponded exactly to PC Quotes's float
of 3.6 million shares.
Figure 6: Zoltec Companies (ZOLT).
The sideways turnover base was 30 weeks. The
cumulative volume corresponded to Zoltec's float
of 4.5 million shares.
EXTENDED-PRICE PATTERNS
The third pattern is by far the
most dramatic. It occurs when stocks are making
extremely fast moves to the upside. This pattern
predicts when profit-taking will set in. The key
is in knowing that very fast runs to the upside
will last one complete turnover of the float.
Zenith Electronics (ZE) is such
an example. In early May 1996, Zenith had a very
fast run from the $6 level all the way to $26, in
only seven days! Study the four charts of ZE in
Figures 7 through 10, in which I have shown what
the turnover of the float looked like at various
points during the move. Zenith, a stock with a
turnover of 51 weeks, went to a turnover of just
four days long.
The first chart of Zenith
(Figure 7) shows its turnover base of 51 weeks
just previous to the fast run to the upside. The
second chart (Figure 8) is five days later and the
turnover is now 106 days, with the price closing
just under $16. The third chart (Figure 9) shows
one day later, and the turnover has plummeted to a
scant five days. At this point, we know the stock
is about to pull back and correct. All the
available shares had traded once since the move
began.
Figure 7: Zenith Electronics (ZE).
The base formed over a period of 51 weeks.
Figure 8: Zenith Electronics (ZE).
In the middle of Zenith's fast run to the upside,
its float turnover dropped to 106 days.
Figure 9: Zenith Electronics (ZE).
On the fifth day of the run, all of Zenith's 45
million shares traded once. The turnover was by
then just 5 days long and an imminent correction
was signaled.
The next day (Figure 10) that
the stock actually hit a high of $26, everyone who
had bought just five or six days before at the $6
to $10 range were looking at some pretty quick
profits. The buyers of the low-priced shares
dumped their shares on the market and the price
crashed. If you could watch this action in real
time, you would see that once the price reached
the $26 level and started down, it dropped very
quickly as the sellers overwhelmed the buyers.
Remember fast runs to the upside only last as long
as there are shares to trade, and then a
correction sets in.
Figure 10: Zenith Electronics (ZE).
On the last day of the run, Zenith his $26, but a
profit-taking correction sends the stock down
below $18.
In some cases, the correction
lasts only a short time, long enough for a new
turnover base to form. Then the stock heads higher
again. An excellent example of this is Biotime
Inc. (BTIM), presented in Figure 11. In the middle
of March 1996, Biotime broke above $4 on high
volume and ran to $9 in just four days. During
this time, all the shares traded. The next day,
after reaching $10 a share, it experienced a
correction to below $8. During the next six days,
a sideways turnover base formed, and then in early
April the price broke above $10 and ran up to $18
before a profit-taking correction set in.
Figure 11: Biotime (BTIM). With
a float of just 1.6 million shares, Biotime had a
long turnover base (A), followed by a quick run to
the upside (B), followed by a short, eight-day
base (C), and then another quick run to the upside
(D).
TOPPING PATTERNS
For many stocks forming a final
top, the top often equals one turnover of the
float in length. This is the fourth pattern often
seen in float analysis. In this pattern, breaking
below the bottom turnover line is a good time to
sell.
In Figure 12, Micron Technology
(MU) is an excellent example. In the first nine
months of 1995, Micron tripled in price
approaching $100 a share. In the last few months
of the year it dropped steadily down into the $30
range. Right at the top, it went through one
complete turnover of the float before the price
broke below the bottom line of the WCVFI to give a
sell signal. Other examples that show this pattern
are Alliance Semiconductor (ALSC) displayed in
Figure 13, Kulicke & Soffa (KLIC) presented in
Figure 14 and Touchstone Software (TSSW) exhibited
in Figure 15.
Figure 12: Micron Technology (MU).
The turnover of the float only took five weeks for
Micron Technology before a sharp decline unfolded.
Figure 13: Alliance
Semiconductor (ALSC). The top formation went
through a complete turnover of its shares right at
the top before a long drop.
Figure 14: Kulicke & Soffa (KLIC).
All of Kulicke & Soffa's float, 18 million
shares, changed hands in 11 weeks right at the top
of its stunning run.
Figure 15: Touchstone Software (TSSW).
Five weeks of trading and the turnover of the 5.9
million shares of float in Touchstone preceded the
sharp market decline.
CONCLUSION
There is a need for an expanded
definition of a variety of technical terms, called
"area patterns" by Edward and Magee in
their classic text, Technical Analysis of Stock
Trends. Technical terms such as
"consolidation," "correction,"
"building a base," "trending
sideways," "overhead supply,"
"cup and handle," and
"breakouts" should all be viewed from
the perspective of float analysis. The Woods
cumulative-volume float indicator provides a new
way for the technical analyst to view and quantify
price consolidations and breakouts. When this is
done, a clearer perspective arises pointing to
greater profits and smaller losses.
Steve Woods, a
former elementary school-teacher, is a private
investor. His E-mail address is stevewoods@floatanalysis.com.
Jan Arps, 910 292-1641, a trader and systems
developer for more than 35 years, is currently
director of research for the Centre for Advanced
Trading Technologies in Gibsonville, NC. He has
written over 200 systems and indicators for
TradeStation and SuperCharts, including the Woods
Cumulative-Volume Float Indicator.
RELATED READING AND RESOURCES
Edwards, Robert D., and John
Magee (1966). Technical Analysis of Stock Trends,
John Magee Inc.
Gann, WD (1976). Truth of the
Stock Tape, Lambert-Gann Publishing:Pomeroy, WA
*TradeStation *SuperCharts (Omega
Research) *Daily Graphs *Investors
Business Daily
Reprinted with permission from Technical
Analysis of STOCKS & COMMODITIES TM
Magazine.
(C)1996 Technical Analysis, Inc. (800) 832-4642, http://www.traders.com
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