They Reveal Dark Pool Quiet Accumulation
Momentum Runs are not
perpetual. At some point Professional Technical Traders who are one of several
drivers behind Momentum Runs, will take profits at technical resistance levels.
Understanding whether
the Price action is simply profit taking by Professionals or a sudden reversal
of trend, is critical to successful Swing Trading. Oftentimes Retail Swing
Traders make the mistake of using a “Stop and Reverse Strategy” SARS, with
disastrous results during a Momentum Market Condition.
The key analytical
elements rest with the Relational Technical Analysis™ between what Price
does during profit taking, and how Volume and Quantity Indicators are behaving.
Are the Volume and Quantity Indicators confirming, or are they contrarian to
the Price action?
The chart example
below is an excellent example of why so many Swing Traders using Stop and
Reverse Strategies which focus solely on Price action, have problems and
whipsaw trades that go against them.
The chart shows a Momentum Style Run out of a “Basing Bottom.” This formation is one of many new bottoming types that have started showing up over the past couple of years. It is because the Dark Pool venues have increased activity off the exchanges, with new order types that allow for new controls on entries for giant lot activity by the giant Institutions.
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The
majority of indicators that are popular now are Price and Time Indicators. Just
using them for direction indication on the last day shown on the chart, it
really looks like the stock is poised for far more than just profit taking. It
appears that the Engulfing Black Candlestick is a sell signal or Sell Short
signal. The expectation of Technical Traders who only use Price and Time
Indicators, would be that this stock is going down.
Advanced
and Experienced Traders should recognize that MACD is
showing an extreme upside pattern. Since you all know this indicator lags, this
big black candle looks to be negative given how MACD looks. Stochastic is
another highly popular Price and Time Indicator.
It had an extreme spike and
now is crossing down, as a signal to potentially Sell Short or use SARS. Both
Price and Time Indicators by themselves are indicating to a SARS Trader, that
it is time to Sell Short.
Now
instead let’s use the indicators of Volume, Accum/Dist, the Volume Oscillator
CHiO, and Money Flow Index Indicator MFI for the same stock.
The
chart picture is totally different when you add the critical third element of
data that comes from the market, which is Quantity.
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The 4 Quantity Indicators all show Dark Pool Quiet Accumulation by the giant Buy Side Institutions, even as the stock sold off that day. So as profit takers sold and others started Selling Short, giant Institutions were buying giant lots. This is crucial information for Swing Traders.
Volume is in a resting phase pattern, and Accum/Dist is ticking up. The Volume Oscillator CHiO was still rising toward the center line where it oscillates, and Money Flow Index MFI Indicator is angling upward rather than down.
What Quantity Indicators add to analysis is enormous. It makes a huge difference in decisions that impact Return On Investment ROI, and overall income.
The final chart example below shows that the stock was merely resting, before another Momentum Run.
Summary
Price and Time Indicators by themselves are not enough anymore. Sure, Price used to be the most important indicator. However in the past 5 years all that has changed, due to the fact that the use of Dark Pool venues has gone from 5% to 18% by the giant Institutions and is still rising. Without Quantity Indicators and understanding how to use and apply them, Traders are simply guessing rather than analyzing.
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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
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Disclaimer: All statements are the opinions of TechniTrader, its instructors and/or employees, and are not to be construed as anything more than an opinion. TechniTrader is not a broker or an investment advisor; it is strictly an educational service. There is risk in trading financial assets and derivatives. Due diligence is required for any investment. It should not be assumed that the methods or techniques presented cannot result in losses. Examples presented are for educational purposes only.
Disclaimer: All statements are the opinions of TechniTrader, its instructors and/or employees, and are not to be construed as anything more than an opinion. TechniTrader is not a broker or an investment advisor; it is strictly an educational service. There is risk in trading financial assets and derivatives. Due diligence is required for any investment. It should not be assumed that the methods or techniques presented cannot result in losses. Examples presented are for educational purposes only.