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VOLUME


Chubb: Volume, Price and Money Flow

11/02/00 02:41:12 PM
by David Penn

Has the summer buying interest in Chubb Corporation returned as a search for sturdy autumn shelter?

Security:   CB
Position:   N/A

For those looking to avoid the whipsaw of jumping into and back out of high-tech and telecommunications stocks, could there be anything more refreshing than a stock rising out of a consolidation range to set new highs?

If not, then consider the shares of Chubb Corporation, a major insurance provider whose stock--like that of other "defensive" investments like utilities and healthcare--has been increasingly sought after by investors as the major markets struggle to turn declines into trading ranges and trading ranges into advances. While Chubb shares enjoyed a major run in late July--a climb that brought prices to the mid 70s--the stock has been mired in a trading range since early August. End of month trading in October helped Chubb rise to as much as $86--briefly escaping the trading range and setting a new 52-week high--before traders took some money off the table, sending Chubb down into the low 80s.

Volume is not always as instructive with price moves as we might prefer. But in the case of Chubb, volume seems to suggest enduring interest in the stock. On the three trading days in late July that accompanied Chubb's jump from about 66 to 75, volumes were respectively 1.5 million, 4 million and 3 million shares. This suggests significant strength for the stock--both in the sizeable volumes recorded on bullish trading days, as well as the fact that Chubb managed to establish a trading range between 72 and 80, well above the stock's previous stomping ground in the 60s. Volume on Chubb's recent upmove outside of its trading range was over 2 million shares. This is compared to an average trading volume of approximately 750,000 shares.

Chubb Corporation was big on the "buy" lists this summer, leading to a runup at the end of July. Trading returned to average levels during a consolidation range before breaking out on the upside on more strong volume.
Graphic provided by: StockCharts.com.
 
On-balance volume also provides reason for Chubb bullishness. On-balance volume (or OBV) combines price action with volume by giving the trading session's volume a positive value when the session ends up, and giving volume a negative value when the session ends down. Thus, rising on-balance volume suggests both that price action is bullish and that volume is rising accordingly. In other words, rising on-balance volume is very much suggestive of strength. With Chubb, not only is the late July run up accorded rising on-balance volume, but the upmove out of the trading range in late October is also accompanied by rising on-balance volume. In fact, this instance of rising OBV is all the more compelling insofar as OBV in late October is breaking out above its 30-day moving average. Even with the slight pullback seen in the chart, Chubb's OBV registers strength at the stock's current pricing.

Lastly, a look at money flow reveals some interesting--if not overwhelming--patterns. Money flow is also concerned with volume--in particular, how price action relates to patterns of accumulation (buying) and distribution (selling). The Chaikin Money Flow (CMF) indicator used here provides positive values when prices close in the upper half of the daily trading range, and negative values when prices close in the bottom half of the daily range. The CMF indicator also uses the accumulation/distribution line (also known as the A/D line) as the basis for its initial values. The CMF takes the sum of values for the accumulation/distribution line over a given period (here, 21 days) and divides that sum by a sum of the volumes over the same period. The resulting value, along with its positive or negative notation, is then plotted over time. Generally speaking, values less than a negative 25% (-0.25) suggest strong distribution is underway and values greater than a positive 25% (+0.25) tend to indicate that relatively strong accumulation is taking place.

Both the degree and the duration of the CMF's indications are also valuable. Not only does a higher positive reading mean stronger accumulation than a lower positive reading, but also a longer-lasting positive reading signifies more buying pressure than a brief or intermittent positive reading. It is also widely believed that longer periods of accumulation represent stocks moving from weaker investors to stronger ones, and that longer periods of distribution suggest stronger investors selling their holdings to weaker investors. Looking at Chubb, the CMF suggests that the prolonged accumulation period from mid-July to the end of August was most likely not undone by the relatively brief distribution that took place at the beginning of October. The rising CMF at the end of October, combined with the rise in both real and on-balance volume, further suggests that those who bought Chubb in mid-summer are likely enjoying the bounty of an autumn rally. And those still looking to get into Chubb may have time to do so before the harvest is done.



David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

Title: Technical Writer
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