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.
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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