Market Participant Groups Cycle, Part 2

Understanding Who Moves Price in Specific Ways

The Dow Jones Industrials (DJ-30: INDEX) is the chart example for this study lesson blog post, as well as the previous blog post. For the previous article lesson I wanted the focus to be on the analysis of the candlestick patterns, and not on the name of the chart example. It is important to realize there are patterns within patterns of candlesticks regardless of whether it is price or value. Indexes are NOT prices, they are formulated values.

The Dow 30 represents 30 companies. It used to represent 30 industries but no longer, and this skews the Dow in favor of some industries over others. Therefore this index can skew the true market breadth aka the broadness of the buying or selling among ALL 31 industries, classified by economists for the US economy of today.

I am hoping all of you who are reading this have studied the previous blog post chart example, and have made some notes so you can compare what I am saying to what you saw. If not, please do so first, before continuing with this article.

The Dow 30 chart example below shows the short-term bottom formation between January and mid-February 2016.

chart example from dow 30 showing short-term bottom formation between january and mid-february 2016 - technitrader

The Market Participant Groups Cycle occurs in visual candlestick patterns on the charts, and analysis should be confirmed with appropriate indicators. The following is a break down of the Participant Groups by name in the cycle, and the chart example shows their footprints.

Prior to this short-term bottom, the Dow 30 had been in a weak Trading Range wide sideways pattern after a “fake rally” in October 2015, brought about by Retail Traders and Smaller Funds Market Participant Groups. The rally failed to break through the resistance from May-July 2015 highs, which was a critical factor in analysis of this Index at that time. Coupled with lower Volume, inconsistent runs, and a lack of Dark Pool Accumulation continuation patterns the fake rally collapse was obvious even before the steady lower highs of November-December. The collapse of the fake rally in January caused many Smaller Funds to panic and start selling, as their portfolios could not manage the selling spree initiated by the High Frequency Trading Firms HFTs. This fueled the selling, with of course retail news spurring smaller investors to fear and panic as well. 

Stocks plummeted to the prior low Dark Pool Buy Zone™ around 15,500. The Dark Pool orders of Time Weighted Average Price TWAP were there waiting to trigger large lots which are 100,000-400,000 and giant lots which are over 500,000 to buy specific Dow 30 components at bargain prices for Fundamentalists. Yes, there are many large to giant lot orders still moving through the automated market system. You just cannot see them anymore as they are ALL off-exchanges.

The Buy Zone was fairly wide and halted the selling panic quickly. 

A true rally followed with Buy Side Institutions using Dark Pools raising their Buy Zones range for the first time in over a year. This was instigated as Fundamentals slowly caught up to stock prices. The Dow 30 moved up to the prior resistance level from 2015-2016 and halted, as the Dark Pools ceased buying well below that level as is their normal pattern.

A tighter formation developed which I outlined for you on the chart. This is a Platform Candlestick Formation, and is the pattern of a combination of Accumulation in bottoming stocks and Rotation in stocks that fundamentally are breaking down as their business cycle contracts well ahead of a Topping Formation. This is called “adjusting inventories to maintain Alpha” for that fund. Most of these giant Institutions have at least one to several S&P500 Funds, which are also Dow 30 components. That is why those two Indexes tend to behave more closely aligned to each other, than with the NASDAQ 100.

HFTs caused the 2 day Sheer Cliff™ Topping Formation collapse. Volume Weighted Average Price VWAP orders trigger on high Volume and so Smaller Funds sell orders fired off. This hit Retail Traders stops, and prices of components fell at an Angle of Descent™ that was unsustainable.

Then Professional Traders jumped in buying, and created a Velocity Run™ which ran price back up. Professionals reacted because they saw the liquidity draw from the exchanges as Dark Pool orders surfaced when stocks fell into their Buy Zones again. The liquidity draw is something Professionals watch for, and you can see the Professionals footprints on the candlestick stock charts if you are using the correct indicators.

As the Dow 30 rebounded the Retail crowd and Smaller Funds remained firmly staunched in panic mode, certain that the British Brexit Vote would mean that a Bear Market was imminent. It does not, because the Brexit Vote was never a US Stock Market event. Buy Side Institutions using Dark Pools, paused their orders as stock prices rose beyond their Buy Zones. 

Values stalled for a few days as the Smaller Funds dumping stock, was countered by the Professional Traders buying. Then the values broke through the resistance barrier. Immediately, Professionals halted their buying to see if Retail Traders would suddenly shift their sentiment as they are known to do. 

The activity last week was Tiny Funds which are the funds with less than 5 million assets under management to Smaller Funds, Retail Traders, and Odd Lot Investors Market Participant Groups. The candles weakened instantly as Professionals ceased buying to wait for an opportunity to take profits. Stock prices wavered, candles shrunk, and the run rounded. Volume dropped as is typical when the Retail crowd takes control.

Summary 
When you know who is controlling the price of a stock then you are able to trade with knowledge, beyond the mere candlestick pattern or indicator crossover which tend to give false signals at times. You know how price will behave as different Market Participant Groups react to news, facts, or information that other Market Participant Groups do not have access to.

Study a chart NOT just by looking at Candlesticks or Indicators but as a story that is constantly unfolding, telling you which of the 9 Market Participant Groups is in control of price at that moment. If you do, profitability and reliability of each trade will improve quickly.

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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
TechniTrader DVDS with every course.

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