Time for Volume, Volatility Increases

Knight Trading (NITE - commentary - Cramer's Take) noted today that volume has been light for the past month and that it may not meet estimates. I find it interesting that it took Knight so much longer than the other online brokers to mention this. If you recall, E*Trade (ET - commentary - Cramer's Take) and Schwab (SCH - commentary - Cramer's Take) mentioned last month that the sharp decline in volume would have a negative effect on their profits.

Today after the close, we can expect reports from Alcoa (AA - commentary - Cramer's Take), Genentech (DNA - commentary - Cramer's Take) and Yahoo! (YHOO - commentary - Cramer's Take). As we kick off earnings season, both volume and volatility tend to pickup as investors start to trade in and out of positions, and as speculators look to capture short-term moves.

The large number of announcements from companies across the board could be the spark the market needs to get going again. From a daytrader's point of view, there already seems to have been a pickup in volatility in individual stocks.

Measuring Volatility

Remember, there are two ways to look at volatility. The first is to look at the market as a whole, which may include the major indices as well as blue-chip industrials and tech stocks. If you find yourself trading with the market and looking to capture marketwide moves through trades in futures or big-cap stocks, this is the measure that will most affect your trading.

If you, like me, find yourself (at least recently) focused on individual stocks, perhaps those driven by a news announcement or interaction with a key technical level, then you need not concern yourself as much with the market. This is especially true for those people who trade small-cap stocks and other, lesser-known names. Also remember that even some household names still could be classified mid-caps or small-caps, such as Cheesecake Factory (CAKE - commentary - Cramer's Take) or the infamous Taser (TASR - commentary - Cramer's Take).

Stocks to Watch

Some active traders have asked if I know of any stocks that still move throughout the trading day, even when the broader market finds itself range-bound. Kmart (KMRT - commentary - Cramer's Take) is one name that is on the move throughout the day.

The daily chart shows that Kmart's range on a given day easily can exceed 5 points. Particularly active traders who have experience with stocks that constantly shift directions and are seeking volatility will be most interested in this. If you are not accustomed to trading such a stock, you may want to stay away from something like this; it's not for everyone. Spend some time watching this stock before jumping in.

Other names that you may want to monitor for similar activity are NVE Corp. (NVEC - commentary - Cramer's Take), Inamed (IMDC - commentary - Cramer's Take) and Gen-Probe (GPRO - commentary - Cramer's Take). Note that NVE is a small-cap stock, which means that no uptick is required to sell the stock short, further increasing the volatility.

Open Text (OTEX - commentary - Cramer's Take) is a software company that focuses on "vendor licensed Web-based software" (according to Yahoo! Finance). Its stock gapped lower this morning and then sold off, taking it below a key level from May and June. Like so many charts, this one shows a stock that traded through support just a bit and then reversed.

The levels and trend lines that affect this chart have been around for several months now. I prefer to trade stocks with strong trend lines, and I feel that they have more credibility on each move. The support level tested today was near $27.25 (note that today's low is $26.90). These days, we often see a stock hit such a point and then quickly sell off through it as stop orders are tripped and others try to force the stock lower.

If Open Text can bounce, look for resistance to kick in near $29. A move above $29 should take it back to $30.50 and then perhaps to a test of the recent high of $32. Depending on your perspective, it could be said that the stock is primarily stuck in a range between $27.25 and $32, but you would have to exclude the major selloff down to the 200-day moving average that occurred in May.

If the selling continues, look for it to trade down to $25 with a stop at $26.

Keep in mind that the software group has been punished today due to news releases from major companies, so it's likely that Open Text is moving in sympathy.

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Please note that due to factors including low market capitalization and/or insufficient public float, we consider NVE Corp. to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

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David Baker is a professional trader and a principal in The Capital Trading Group. At the time of publication, Baker did not have any positions in any of the stocks mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. He appreciates your feedback and invites you to send your comments to [e-mail].