Volume Indicators Reveal Accumulation Patterns
Relational Analysis
embodies more Technical Analysis and often Fundamental Analysis, to derive a
clearer understanding of the behavior of price.
The chart example
below is currently in what is called a Platform candlestick formation.
This is a very
specific type of sideways price action, which only forms when Buy Side
Institutions using Dark Pools are accumulating a stock. It forms due to the
type of orders that these giant lot investors use. They use a bracketed order
type available on Dark Pool venues, and thus price can be controlled in
a precise manner.
The Platform is
typically 10-12% in width or magnitude. The runs within the Platform are too
small and brief for good Swing Trading, however often times less informed
Retail Traders will try to Swing Trade these intra-range runs with results of
whipsaw action.
The Dark Pool
bracketed orders are automated, but they are not High Frequency Trading HFT
firm orders. The sideways action in itself will not reveal whether this is
Accumulation or Rotation by the giant Institutions.
Indicators other than
those that use just Price and Time are required for Relational Analysis of a
Platform Candlestick Formation. It is needed in order to determine if
this is Accumulation which is the buying of stock slowly over many weeks to
months, or Rotation which is the selling of stock slowly over many weeks to
months to lower inventory of a long-term held stock. Distribution is the term
used for the sudden selling of shares by Institutions to meet redemption
demands.
Volume and
Accumulation/Distribution Indicators, Volume Oscillators such as ChiOsc, and
Flow of Funds indicators such as Money Flow MFI will reveal whether buying or
selling is dominant.
This stock chart does
have an Accumulation pattern, however it is likely to continue moving within
the Platform price range for a while due to the heavy Smaller Funds selling
against the giant Institutions quietly buying.
The chart example has
defied the overall market the past couple of days as most stocks collapsed with
the news of the British Brexit Vote. This chart example is of a big blue chip
stock and a Dow 30 component. Despite the Dow falling sharply recently, this
stock held within the Platform formation. To see why it was able to do so
requires using Relational Analysis.
One fact that often
eludes traders who have not learned Relational Analysis, is the fact that the
giant Institutions using Dark Pools buy in giant share lots of 100,000-500,000
over extended periods of time but do not move price.
The Securities and
Exchange Commission SEC MIDAS has been tracking these giant lot orders for
several years. The SEC has determined that the giant Institutions using the
Dark Pools do not gain any price advantage. Their orders tend to execute in the
middle of the National Best Bid Offer NBBO. In addition the average time to
fill the giant lot orders is 10 minutes, because often the liquidity must come
from several venues.
Although the Dark
Pools hide their activity to avoid front running from HFTs and other predatory
trading systems, the giant Buy Side Institutions leave footprints that are
easily seen on a stock chart.
Relational Analysis is
more sophisticated than standard Technical Analysis, and takes some time to
learn in order to be able to interpret quickly and accurately. However the
Relational Analysis of a Platform Candlestick Formation benefits are
earlier entries, lower risk, and higher profits.
Platforms have a very
specific price controlled range during their formation. Once the Accumulation
ends the stock will breakout of the Platform, and often with momentum energy.
When the giant
Institutions have filled their inventory requirements, word leaks out to others
in the market that they have been accumulating a stock. This initiates buying
action by Professional Traders followed by HFTs, which then are chased by
Smaller Funds and Retail Traders. All of these other groups tend to move price
speculatively.
Summary
Understanding why
price is behaving in a certain manner is important, if you wish to earn higher
profits from short-term trading. The Platform is the ideal pattern for Position
Trading. The term “Position Trading” is defined as a few weeks to several weeks
hold time, during the period when the stock is building Platforms while moving
up in a Moderately Trending pattern.
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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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