- 2000: Volume 9, No. 4 Finding Tops with Float Analysis

Float analysis is a new method of stock research developed from a little known idea of W.D. Gann. Gann's idea, found in his book Truth of the Stock Tape, is to think of all of a company's shares that are traded by the public (known as the float) as a whole unit that gets traded during a specific time period thus implying a change of ownership in the stock. This idea when properly approached allows you to see a price and volume chart as only two-thirds of a total chart picture. What needs to be factored in, to make the picture complete is the number of shares being traded at any given time. This then is what float analysis strives to do.

To better understand this idea, imagine a hypothetical time span in which all of a company's tradeable shares go through a complete turnover resulting in new ownership. Now think of this time span as a constantly changing phenomena. As a stock's price rises and falls, the constantly changing ownership moves from one price level to another. Now think of a high flying stock that has all its shares sold to a "dumb money crowd" right when the stock's price is so far over-valued that it no longer warrants being bought by savvy investors. Now think of the biotech stocks in March of the year 2000.

Figure 1

The Float Turnover as a Proxy for a Change in Ownership

Before examing some Biotech companies, let's further clarify this idea. At first glance it would appear a rather futile task to try and study a company's ownership as a whole unit trading over a specific period in time. The reason is obvious when we think of all the owners of a company that own the stock at any given time. Some owners will be long-term investors who may have bought their shares years ago and some owners may be day traders who are buying and selling their shares daily. Thus it seems impossible to track the ownership of a stock as a whole unit because we can't truly look at any given time period and know for sure of what the ownership is really made up. But there is a way to create a unit of measurement that will serve as a proxy for a total change in ownership. Using a simple method, we merely add a stock's volume cumulatively until it equals the number of shares in the float. The amount of time that it takes for this cumulative volume total to equal the float becomes a unit of measurement or a "float turnover".

Let's be quite clear about this idea. A float turnover does not have all the shares in the float trading hands. Rather a certain amount of cumulative trading volume is equal to the float. For example, suppose that in the past year Company XYZ has a total trading volume of 30 million shares and it also has 30 million shares in its float. Then we could say that it's "float turnover" is one year in length because in the past year, 30 million shares were traded and the company has 30 million shares that are actually being traded by the public. Thus by our definition we have a float turnover and we can use this time span unit as a proxy for a complete change in ownership of the company.

Figure 2

The Float Turnover That's Always At A Top

When stock analysis is approached from the point of view of "float turnovers" as a proxy for a theoretical change in ownership, stock charts suddenly make more sense as though the missing piece of a puzzle was finally discovered. For example, look at any stock chart with a long-term trading history and you will find that several very specific float turnover formations always occur. The most obvious and easiest to see are at bottoms and tops. Float turnover formations quite simply will always be found at the exact location that marks a long-term bottom and at the exact point that marks long-term tops. In addition, single and double float turnovers often are found in sideways consolidation areas in a stock that is trending upward. In my book, The Precision Profit Float Indicator (MarketPlace Books, 2000), I show 10 specific float turnover formations that can be found on price and volume charts.

Figure 3

Biotechs at a Top

Now as an example, let's go back to the Biotech stocks that crashed earlier this year. The NADSAQ composite index was in a wicked bear market in April 2000 and the index was over 30 percent off its high. Before taking this nasty tumble, the NASDAQ soared to incredible heights. One of the speculative groups that lead the bull market so high was the Biotechs and when the market corrected they were the first group to sink quickly. As a group they offered more promise than profits. Take a close look at all the charts in this article and notice that they are biotech companies that had a float turnover at the top just as they were in the process of crashing back to earth.

What this means is, that the cumulative trading volume right at the top was equal to each company's floating supply of shares. Remember that a float turnover is a proxy for a theoretical change in ownership and thus it shows that this hypothetical ownership at the top got stuck owning stock that decreased dramatically in price after they took ownership. What these charts also show is that when the price broke below the "float turnover at the top," an excellent sell signal was given that would have alerted savvy long-term investors to exit their positions.

Figure 4

The Woods Cumulative-Volume Float Indicators

To better understand how these charts track float turnovers and give excellent sell signals, we need to understand indicators known as the Woods Cumulative-Volume Float Indicators (also known as the Precision Profit Float Indicators). Two indicators are plotted on each of these charts. The original Woods cumulative-volume float indicator is easily located because it has two parallel horizontal lines with a red dot placed at the far left of the two lines and can be found at the top of each chart. The second indicator is derived from the first indicator and is known as the Woods cumulative-volume "channel" float indicator. This channel indicator has two channel lines that at times has the price above, below or in between them.

On the first indicator, the two lines and a dot are simply time and price components to show us where the float turnover exists at a specific time on the chart. The dot is the time component that marks the bar in which the cumulative volume count equaled the float. The two horizontal parallel lines are the price component and they show the highest and lowest price swings during the float turnover time span. Add up the cumulative volume beginning from the far right bar of the two lines to the far left bar with the red dot above it. This cumulative volume total is equal to the company's float.

Figure 5

Understanding the Channel Lines

Now to understand the channel float indicator, we need to think of the float turnover as a rectangle. We already have the two horizontal lines that show the highest and lowest points and to these we will add dotted vertical lines. The dotted vertical lines are useful as a teaching tool to explain how the channel lines are created. By adding dotted vertical lines to our two horizontal parallel lines, the float turnover is now framed, making it a rectangle. Now think of the price bar on the far right side of our rectangle. Only the points at the top upper right hand corner and the bottom right hand corner of our float turnover rectangle are used to create the channel lines. By connecting only these upper right and lower right points on a bar-to-bar basis, we end up with channel lines. These lines show when the stock's price is above, below or inbetween the existing float turnover range.

To see this more clearly look at Figure 6 which shows several turnovers at a variety of points in the stock's price history. Study this chart closely and you will see that by connecting only the upper right and lower right points of our constantly changing float turnover we end up with channel lines.

Figure 6

Rising Base of Support and Falling Overhead Supply

These channel lines are very potent tools that allow you to determine whether a stock price is being supported by strong players on the way up or whether it is being distributed to weak hands on the the way down. When the stock is being supported, its price will tend to be at the top of the float turnover price range with the float turnover acting like a rising base of support. When the stock is dropping without support, the price will tend to be at the bottom of the float turnover price range with the float turnover acting as overhead supply. On the channel lines we see this easily as the rising price hugs the top channel line and the declining price tends to hug the bottom channel line. What we then find right at the top, as was previously mentioned, is a float turnover that approximates the stock's ownership that got stuck at the top holding a losing position as the price dropped below them. The timely sell signal occurs right at the point where the price drops below the float turnover at the top which is the point where the price crosses the bottom channel line for the first time on each chart.

The Common Sense Nature of Float Turnovers

Whenever I describe my type of stock analysis to someone who is unfamiliar with it, I invariably get an "Ah, ha" reaction when they realize the common sense nature of float turnovers at bottoms and tops. "I get it," they say "Right at the top all the shares are bought by unsuspecting foolish investors who don't realize the stock is over-priced and they get stuck at the top." or "Oh I see, right at the bottom the really smart people are buying all the shares and the price goes up because they're holding them tightly." Then of course I have to explain that it's not exactly all the shares that are bought but just a good approximation of them.

Figure 7

Ideas to Keep in Mind

When float turnovers are used as a tool in stock analysis there are several important ideas to keep in mind:

1. Think of float turnovers like a moving average. A float turnover is a constantly changing unit of measurement. New volume numbers get added into the count each and every day and the distance going back to the end of the float turnover changes often as well.
2. Recognize that every stock is different. Some stocks have very rapid float turnovers that occur over only a few days and other stocks have float turnovers that take years for one turnover to occur.
3. The New York and American Stock exchanges count volume in a different manner from the NASDAQ market. The NASDAQ counts 100 shares traded for every buy and every sell. Thus 100 shares traded between two parties ends up being reported as 200 shares traded. The NYSE and AMEX count 100 shares traded between two parties as just 100 shares traded. Thus the NASDAQ market doubles the actual volume numbers and this must be taken into consideration when the numbers are being cumulatively calculated.
4. A company's float number can and does change which makes analysis a challenge. The source used for all the float numbers in this article is found on the "Profile" page of each individual company at http://finance.yahoo.com. The numbers were current in April 2000.
5. It will appear on certain bars and in particular at specific trading "buy" and "sell" points, that the two horizontal lines on the Woods Cumulative-Volume Float Indicator that represent the highest and lowest points that the price has reached duing the float turnover time span, are not actually plotted at the highest and lowest point of the float turnover and thus seem inaccurate. The reason for this is that we want to be alerted to buy and sell signals which occur when the price breaks above or below a current float turnover price range. Thus if on a particular bar the price penetrates through the existing top or bottom lines of a float turnover, the price is shown as going through that line. Then on the next consecutive bar, the high and low price range is replotted at the new level. This allows us to see quite clearly when the price is moving above or below a pre-existing float turnover. It also allows the line to serve as triggers that generate buy and sell signals.
6. A float turnover is a good proxy for a change in ownership of a company's floating supply of shares. It is an approximation in which a large percentage of the float has actually changed hands. But that percentage can never be accurately known.

Summary

Float turnovers are always found at the exact top of a stock's long-term price and volume history. For this reason, float analysis is a good way of finding tops in the stock market because a company's float is like the missing invisible piece of the price and volume chart puzzle. Price and volume are only two-thirds of what is truly happening on a price and volume chart. The missing third piece of the puzzle is the shares that are actually being traded (i.e. the float). With float analysis, stock technicians now have a new measurement tool, to help them make wiser and more informed buy and sell decisions.

Steve Woods is the developer of float analysis and author of The Precision Profit Float Indicator, Powerful Techniques for Exploiting Price and Volume.