Relational Analysis of a Platform Candlestick Formation

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.

cvx: nyse chart with platform candlestick formation - technitrader


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
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