How Technical Patterns Reveal Hidden Liquidity Draws Caused by Dark Pool Quiet Accumulation

Beyond the Basics of Candlestick Patterns 



Quiet Accumulation is a very precise pattern that is easily recognized, once a trader learns to look for it. Quiet Accumulation occurs when Buy Side Institutions are slowly and incrementally buying a stock over an extended period of time, often many months to over a year.

Buy Side Institutions are divided into two groups:

1.  Giant Buy Side Mutual Funds such as Fidelity, Buy Side Pension Fund Management Companies such as Frank Russell or California Teachers Retirement, Larger Buy Side Funds such as Janus. There are a small number of fund entities that fall under this category of large to giant sized fund.
2.  Smaller Buy Side Funds which number in the tens of thousands and range in size from one individual managing a fund worth $100,000 to funds managing under 100 million.

The Institutions that matter most are the larger to giant funds. These institutions can hold 10-40 million shares of just one stock or more, depending on their intent.

When a major Buy Side Institution buys stocks, it cannot just go out and buy 10 million shares all at once, that would create such a massive liquidity draw that the price would skyrocket. Rather, they mostly buy a stock slowly in increments over time. Their lots are however, still huge compared to all other Market Participant Groups. Over time their patterns begin to show up on charts and Candlestick Patterns, that only this group creates.

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No other Market Participant Group forms these patterns. This is due to their usage of Dark Pool Alternative Trading venues, which give them legal right to delay orders during the day to hide their activity. Most of the time Dark Pool orders are only showing up 3-4 hours before the market opens in the mainstream data, or after the consolidated ticker data is in for the day which can take more than an hour to show up after market closes.

Most Retail Traders have no idea what is going on behind the scenes, who is creating what technical patterns and where they typically create those patterns. Most Retail Traders are fixated on “strategies,” “crossover indicators,” and a few candlestick continuation or reversal patterns.

This narrow perspective tends to overlook the broader picture that is evident in the charts. This is because most Retail Traders are not reading the chart; instead they are merely looking for some pattern to trade on some sort of news.

The liquidity draw of the Buy Side Institutions using Dark Pools is a critical aspect of Technical Analysis not taught in most Technical Analysis books. I call it Relational Analysis™ because in order to see the pattern you must combine the analysis of Price, Volume, Accumulation Indicators, and Trendline Pattern to see the footprints that are on the chart.

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When Buy Side Institutions pull sufficient liquidity, Professional Traders can see this and react by also buying into the stock using the accumulation as an entry. Later High Frequency Traders will discover the liquidity draw as well, and the stock will run up suddenly or gap up. Then the Smaller Funds will chase the High Frequency Trader runs, as they use Volume Weighted Average Price as their trigger.

With the exception of some Dow components, the overall Stock Market activity has been very sideways with tighter formations, yet the chart example stock suddenly gapped 3+ points this morning ahead of open. See chart example below.

chart example with sudden gap - technitrader
Summary

Prior to this gap, the footprints of Dark Pools quietly accumulating starting in mid-summer is evident on the chart. A compression pattern preceded the gap as Professional Traders lined up ahead of the High Frequency Traders.

This is a stock that TechniTrader Students have been aware of since the accumulation began. It takes more than a strategy, an indicator, or a candlestick pattern to be consistently successful trading stocks. Sure you can get by with hit and miss results but ultimately the truly profitable traders, are those who learn to understand what is going on far beyond the basics that most traders are taught.

Trade Wisely,

Martha Stokes CMT

TechniTrader technical analysis using a StockCharts chart, courtesy of StockCharts.com


Chartered Market Technician
Instructor & Developer of TechniTrader Stock and Option Courses
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