Technical Analysis of Stocks Commodities
Magazine Article - December 1996

The following article appeared in the December 1996 issue of :



"Technical Analysis of STOCKS & COMMODITIES, The Traders' Magazine that provides serious traders with information on how to apply charting, numerical and computer trading methods to trade stocks, bonds, mutual funds, options and futures."

Float Analysis

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 support@floatcharts.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 .