dbphoenix
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You may find the following helpful:
Begin by thinking of the market – an auction market -- as a giant bazaar. Lots of buyers and sellers, all excitedly negotiating prices. If a lot of people are crowded around a particular merchant's stall, he can demand premiums for his goods. If another merchant is getting little or no traffic, he must lower his prices in order to unload his stock. If he's able to manufacture a demand, he can then raise them again. Either that or use whatever demand he creates to unload whatever junk he's selling and move on to something else.
Consider also that all stocks go through accumulation/distribution cycles. These cycles can last for anywhere from a few minutes to several years. Which cycles you focus on will depend on the kind of trader/investor you are and what your time horizon is.
Here's how it works. Somebody's attention is caught by a particular company or its stock. They like it, think the price is reasonable, and begin accumulating it. But they do it gradually and in small lots so they don't attract attention to what they're doing. If they attracted attention, others would start buying the stock as well and the price would be driven up because of the increased demand.
When they've accumulated all that they want, they'll either hold on and wait or they'll "test" the market by offering some of their shares to see what the demand is. If the demand is there, they'll offer more as the price rises (and since there are now fewer shares on the market, there's less to stop the price from rising if the demand is sufficient). If the demand increases and the price rises further (because of buyers willing to pay ever-increasing premiums), they may hold back their shares and let other holders provide the supply for the time being, then sell more of their shares, or all of them, when the price represents their target profit level. Selling into this increased demand is "distribution". It, like accumulation, is quiet. The holder of the shares doesn't want to dump a huge amount of supply onto the market for fear that there may not be enough demand to absorb it, and the last thing he wants to do at this point is drive down the price. When the stock has topped out and the real selling takes place, he's already out of the stock. Thereafter, unless demand increases, the stock falls until it represents "value", to somebody, for some reason. Then the whole process starts all over again.
This is the basic process and cycle. However, it's complicated by the fact that there are many buyers and sellers, each with his own agenda. A seller may distribute all his stock, for example, but demand continues. It may not be enough to drive the price higher, but it may be enough to keep the price from falling. So, you enter a secondary (or whatever) base in which a new accumulation/distribution cycle begins.
The trick is to figure out whether this new "consolidation" period represents accumulation or distribution, and one way is to watch the relationship between price and volume. How does the stock react when a lot of stock is dumped onto the market? Does it tank or does it decline only a trivial amount? Is there follow-through to this action or are the following days business-as-usual? If it's a short, sharp decline with no follow-through, you're probably looking at a "shakeout" (forcing weak hands to sell their shares so the stronger hands can pick them up at a discount).
It is important to remember that for a transaction to take place, there must be a buyer and a seller. Huge volume and an increase in price indicates a lot of buying, but it also represents an equal amount of selling. Volume, in other words, reflects only the number of shares traded. Whether the pressure is on the demand side or the supply side is reflected in whatever happens to the price. Unless you put this activity in a context of markets, market psychology, and demand and supply, you stand a good chance of misinterpreting what's happening.
Begin by thinking of the market – an auction market -- as a giant bazaar. Lots of buyers and sellers, all excitedly negotiating prices. If a lot of people are crowded around a particular merchant's stall, he can demand premiums for his goods. If another merchant is getting little or no traffic, he must lower his prices in order to unload his stock. If he's able to manufacture a demand, he can then raise them again. Either that or use whatever demand he creates to unload whatever junk he's selling and move on to something else.
Consider also that all stocks go through accumulation/distribution cycles. These cycles can last for anywhere from a few minutes to several years. Which cycles you focus on will depend on the kind of trader/investor you are and what your time horizon is.
Here's how it works. Somebody's attention is caught by a particular company or its stock. They like it, think the price is reasonable, and begin accumulating it. But they do it gradually and in small lots so they don't attract attention to what they're doing. If they attracted attention, others would start buying the stock as well and the price would be driven up because of the increased demand.
When they've accumulated all that they want, they'll either hold on and wait or they'll "test" the market by offering some of their shares to see what the demand is. If the demand is there, they'll offer more as the price rises (and since there are now fewer shares on the market, there's less to stop the price from rising if the demand is sufficient). If the demand increases and the price rises further (because of buyers willing to pay ever-increasing premiums), they may hold back their shares and let other holders provide the supply for the time being, then sell more of their shares, or all of them, when the price represents their target profit level. Selling into this increased demand is "distribution". It, like accumulation, is quiet. The holder of the shares doesn't want to dump a huge amount of supply onto the market for fear that there may not be enough demand to absorb it, and the last thing he wants to do at this point is drive down the price. When the stock has topped out and the real selling takes place, he's already out of the stock. Thereafter, unless demand increases, the stock falls until it represents "value", to somebody, for some reason. Then the whole process starts all over again.
This is the basic process and cycle. However, it's complicated by the fact that there are many buyers and sellers, each with his own agenda. A seller may distribute all his stock, for example, but demand continues. It may not be enough to drive the price higher, but it may be enough to keep the price from falling. So, you enter a secondary (or whatever) base in which a new accumulation/distribution cycle begins.
The trick is to figure out whether this new "consolidation" period represents accumulation or distribution, and one way is to watch the relationship between price and volume. How does the stock react when a lot of stock is dumped onto the market? Does it tank or does it decline only a trivial amount? Is there follow-through to this action or are the following days business-as-usual? If it's a short, sharp decline with no follow-through, you're probably looking at a "shakeout" (forcing weak hands to sell their shares so the stronger hands can pick them up at a discount).
It is important to remember that for a transaction to take place, there must be a buyer and a seller. Huge volume and an increase in price indicates a lot of buying, but it also represents an equal amount of selling. Volume, in other words, reflects only the number of shares traded. Whether the pressure is on the demand side or the supply side is reflected in whatever happens to the price. Unless you put this activity in a context of markets, market psychology, and demand and supply, you stand a good chance of misinterpreting what's happening.
Thanks dbp - I've already got that from you!
This, in particular, was what my diagram was trying to come to terms with:
Just what does 'fewer shares on the market' mean? It's not as if we ever have shares that are not owned by anybody (except at the beginning). That's why I thought the concept of institutional holders vs. smalltime guys was important. When there are more 'smalltime guys' there is 'more supply' because many of these will be willing to sell relative to what would be the case if the same number of shares were held by 'the big boys' (long sentence!).
I am not sure if I am confused or not!
:cheesy:
This, in particular, was what my diagram was trying to come to terms with:
dbphoenix said:
Just what does 'fewer shares on the market' mean? It's not as if we ever have shares that are not owned by anybody (except at the beginning). That's why I thought the concept of institutional holders vs. smalltime guys was important. When there are more 'smalltime guys' there is 'more supply' because many of these will be willing to sell relative to what would be the case if the same number of shares were held by 'the big boys' (long sentence!).
I am not sure if I am confused or not!
:cheesy:
JumpOff
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Regarding your basic premise (from the image file attached to post #1):
that the price will continue to rise (albeit at different rates) regardless of acc/dist.
What makes prices fall? What would happen if you went to the flea market every weekend to to buy wine, (there are usually 2 vendors with 1 truck load each - price is steady) . One weekend you arrive and some poor fellow is there trying to selling his 2 extra truckloads of wine that he has been gradually buying over the last year for his son's upcoming wedding - The son and daughter-in-law-to-be have called it quits.
The usual price per bottle has been about $9. What is this guy going to have to do if he wants to get rid of this stuff ? Where would any possible buying pressure come from?
JO
that the price will continue to rise (albeit at different rates) regardless of acc/dist.
What makes prices fall? What would happen if you went to the flea market every weekend to to buy wine, (there are usually 2 vendors with 1 truck load each - price is steady) . One weekend you arrive and some poor fellow is there trying to selling his 2 extra truckloads of wine that he has been gradually buying over the last year for his son's upcoming wedding - The son and daughter-in-law-to-be have called it quits.
The usual price per bottle has been about $9. What is this guy going to have to do if he wants to get rid of this stuff ? Where would any possible buying pressure come from?
JO
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dbphoenix
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james6848 said:
Fewer shares available to trade. When professional money holds nearly all the shares, there's little available for the retail trader to trade. This has the practical though not technical result of reducing the float. Apply this to the accumulation process which began in June '02 and lasted until the following spring.
JO - Hi, I wasn't suggesting that prices will always rise, just trying to explain to myself this:
'since there are now fewer shares on the market [after accumulation], there's less to stop the price from rising if the demand is sufficient', and what the implications of this are.
Would you agree with the diagram if I added to accumulation: 'selling pressure will cause price to fall relatively slowly' and to distribution: 'selling pressure will cause price to fall relatively quickly'?
dbp - How does your explanation differ from mine?: Accumulation = more shares to the 'big boys', Distribution = more shares to the little guys, therefore less effective free stock.
'since there are now fewer shares on the market [after accumulation], there's less to stop the price from rising if the demand is sufficient', and what the implications of this are.
Would you agree with the diagram if I added to accumulation: 'selling pressure will cause price to fall relatively slowly' and to distribution: 'selling pressure will cause price to fall relatively quickly'?
dbp - How does your explanation differ from mine?: Accumulation = more shares to the 'big boys', Distribution = more shares to the little guys, therefore less effective free stock.
JumpOff
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If the demand is sufficient price will always rise in any circumstance. I would agree with the part about, 'since there are now fewer shares on the market [after accumulation], there's less to stop the price from rising...'james6848 said:
Price will always fall if there is more selling pressure than buying pressure (fast or slow depending on how eager the sellers are to chase the buyers) During accumulation - where will the selling pressure come from? Accumulation means that some part of the market is quietly absorbing all the stock available below a given price.james6848 said:
Distribution is selling pressure - some part of the market is willing to meet any and all buyers who offer above a certain price "X". Do you mean additional selling pressure- Sellers who are willing to drop their price below "X"?james6848 said:
JO
dbphoenix said:
Sorry, I was not very clear with my grammar. I feel I need to differentiate between 'free stock' as unowned stock, and 'free stock' as stock that is in the hands of eager sellers.
I mean (I think) that there is, in this situation, a relatively high proportion of stock now held by the professionals. They are not eager to sell because they have accumulated stock at a certain level with a plan to get rid of it at a higher price later, therefore supply is relatively low. In the opposite situation (after distribution), there will be a relatively high proportion of stock held by non-professionals, many of whom will be quite eager to sell for various reasons (e.g. they feel they have made a mistake in buying this stock etc.) therefore supply is relatively high.
My head hurts. Why can't I get my head around these principles easily? (I'm not that stupid, surely).
dbphoenix
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You seem to be confusing selling pressure with inventory. The "supply" is relatively constant. What moves price, at least in part, is the amount of supply that is made available. If the selling pressure is light and so is buying pressure, nothing happens. If selling pressure is heavier than buying pressure, price falls. If the opposite, price rises. But supply must always be there if a transaction is to take place, i.e., there must be something to buy. Therefore, the professionals begin "distributing" their shares as soon as the price breaks out of the accumulative base. By the time the price tops, they're out.
I've devoted an entire chapter to this in my book, and it's difficult to explain it in detail in a message board post, or at least it is for me. Perhaps someone else can give it a shot.
I've devoted an entire chapter to this in my book, and it's difficult to explain it in detail in a message board post, or at least it is for me. Perhaps someone else can give it a shot.
JumpOff said:
Yes, but if there is demand and relatively more shares available, surely the price will rise less quickly
I was talking about after accumlation. Any selling pressure then will be relatively ineffective, won't it?
Yes, I think I do.
I also think I need to go back to the drawing board - there is something so obvious that I think I am missing it!
dbphoenix
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james6848 said:
Not necessary. But you're addressing what is essential about trading by price (and volume), and that takes a bit of explanation. Wyckoff devoted a lot of attention to demand and supply, particularly with regards to buying pressure and selling pressure, as did Neill. If you're really interested in this stuff, I suggest you study these two at least. They're both on the reading list you received.
charcoalstick
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false break
DB, according to ur book, a sign of Acculmulation is relatively larger volume when price go up when it is within range and vice versa for distribution (correct me if i m wrong).
I am trying to apply this knowledge to real example. Pls see the chart attached.
Is it possible to read from price and volume of the stock after it hah breakout in early nov whether the subsequent consolidation is accumation or distribution?
,After the stock breakout to 1.60, the voume decline when price pullback which look healthy for further upside. Seem no indicator pointing to downside, though there is increase in volume in the doji and subsequent black candle, but one might thought these are just "shaking-out" of weak players? However, price plunge thereafter.
In a bigger picture, why does it reverse when it seem to be a good breakout with high volume from consolidation?
thanks
charcoalstick
dbphoenix said:
DB, according to ur book, a sign of Acculmulation is relatively larger volume when price go up when it is within range and vice versa for distribution (correct me if i m wrong).
I am trying to apply this knowledge to real example. Pls see the chart attached.
Is it possible to read from price and volume of the stock after it hah breakout in early nov whether the subsequent consolidation is accumation or distribution?
,After the stock breakout to 1.60, the voume decline when price pullback which look healthy for further upside. Seem no indicator pointing to downside, though there is increase in volume in the doji and subsequent black candle, but one might thought these are just "shaking-out" of weak players? However, price plunge thereafter.
In a bigger picture, why does it reverse when it seem to be a good breakout with high volume from consolidation?
thanks
charcoalstick
barrytaylor
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James
Don't mean to butt into your thread but I'm always surprised people don't look at a very simple measure of distribution / accumulation:
Volume / Range
I call it churn - not sure what others might call this.
Distribution is occurring when:
Market is at highs
Volume is large
Range is small - and therefore churn is high.
The same is true for accumulation but market is at lows. And Friday was a classic distribution day on the US indices, particularly NASDAQ.
I see lots of patterns from high and low readings for volume, volume churn and volume climax (which I define as volume X range).
BT
www.Emini-Watch.com
Don't mean to butt into your thread but I'm always surprised people don't look at a very simple measure of distribution / accumulation:
Volume / Range
I call it churn - not sure what others might call this.
Distribution is occurring when:
Market is at highs
Volume is large
Range is small - and therefore churn is high.
The same is true for accumulation but market is at lows. And Friday was a classic distribution day on the US indices, particularly NASDAQ.
I see lots of patterns from high and low readings for volume, volume churn and volume climax (which I define as volume X range).
BT
www.Emini-Watch.com
charcoalstick
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false break
Db,
The symbol is 1174.HK (pacific andes intld ltd ) on hongkong stock exchange
dbphoenix said:
Db,
The symbol is 1174.HK (pacific andes intld ltd ) on hongkong stock exchange
charcoalstick
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gaps
MM1,
Am I right to say that, in your opinion,
1) a rectangle consolidation phase after an exhaustion gap is most likely a Distribution?
2) a breakaway gap from a rectangleconsolidation phase is most likely a false breakout , most likely after which the stock will resume its downtrend without much markup phase?
thanks
chacoalstick
MM1,
Am I right to say that, in your opinion,
1) a rectangle consolidation phase after an exhaustion gap is most likely a Distribution?
2) a breakaway gap from a rectangleconsolidation phase is most likely a false breakout , most likely after which the stock will resume its downtrend without much markup phase?
thanks
chacoalstick
Here's a share that I still hold after several years. No one seems to use the actual Accumulation/Distribution line chart and I like it a lot. It makes it clearer to me than just volume- but I am a dunce with volume, as db knows!
This share, SUY- a UK stock, has had a good ride with a consistently falling Acc/DisAD line. Is there any reason to think that accumulation will come, with a further increase in the price?
Split
This share, SUY- a UK stock, has had a good ride with a consistently falling Acc/DisAD line. Is there any reason to think that accumulation will come, with a further increase in the price?
Split
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dbphoenix
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No need to withdraw anything, Joules. I don't have a monopoly on this subject, and you seem to be a smart guy. However, I'm going to address the original question without looking at anyone else's charts or comments in order to provide what may be an alternative view, so no one should think I'm ignoring them or what they've posted.
I know nothing about this company other than its chief business, so I can't say whether or not this is a stock that professional money is just desperate to own. But in order for the "accumulation dynamic" to play itself out normally, one expects that professional money is involved. Otherwise, one is just as likely -- if not more so -- to be involved in pump 'n dump.
So,
First, back up and look at a better example of what accumulation and subsequent action is supposed to look like, i.e., the first chart. Here, the stock has been under accumulation for more than a year. Note, for example, the spike in trading activity (TrAc) in January which cannot pull price below the range. Ditto the spike in TrAc in July, i.e., there's sufficient buying interest to keep price afloat in this range. When the process is complete is Jan '06, price rises as a result of buying interest, i.e., there has been enough liquidation of potential sellers during the accumulation phase to null their influence during the move out and up (note also that the "big volume" that one is told to expect doesn't occur until price is already 15% out of the gate). There is then a retracement, a higher high, and price chokes at 2.00. Why? Look at the next chart.
Here one can see the R created two years earlier and that the stock has been languishing for quite some time. Whether it had been under accumulation all that time or only during the latter stages of that "base" may not be as important as the question of how long one wants to lock up one's money while other opportunities pass him by. And even if he doesn't buy, how long does he have to follow this stock in order to realize a profit opportunity (other than buying it and selling calls)?
Which brings us to the third chart, which includes the time period you're interested in. In context, one can see that there is clearly something going on with that first spike that has nothing to do with accumulation. There may have been news of some sort. Or rumor. Something. But whatever buying interest there was was purely momentary; there wasn't nearly enough to sustain an upmove.
TrAc does decline, but there is no pullback in price. Price instead just hangs there in limbo. There is insufficient buying interest to push it farther (if there were, price would rise). But there is also insufficient selling pressure to push it down. At least for the time being. Finally, five bars later, there is a spike in TrAc and price closes near its low, not a good sign. On the other hand, price hits the S established in early September with no significant increase in selling pressure (if there were, TrAc would be higher). In other words, sellers, for now, are done.
As to the future, who knows? But this area has served as S for nearly three years, and falling below it would not be good. As for the "shakeout", this occurs in and below the range, and if there were one orchestrated for this, it would have occurred before the "breakout" (see the chapter on Demand/Supply).
You're in a better position than I to know what happened to create that spike in TrAc in November. But you should also re-examine your reasons for choosing this as a trading vehicle in the first place.
Note: when you say "looks healthy for further upside", you appear to be allowing your hopes to overshadow your analysis of what's in front of you. Don't worry about the future. Stay in the moment. And if you're going to use indicators, use them only to confirm whatever conclusions you've reached by studying price. In a contest between price and indicators, price wins.
Db
I know nothing about this company other than its chief business, so I can't say whether or not this is a stock that professional money is just desperate to own. But in order for the "accumulation dynamic" to play itself out normally, one expects that professional money is involved. Otherwise, one is just as likely -- if not more so -- to be involved in pump 'n dump.
So,
charcoalstick said:
First, back up and look at a better example of what accumulation and subsequent action is supposed to look like, i.e., the first chart. Here, the stock has been under accumulation for more than a year. Note, for example, the spike in trading activity (TrAc) in January which cannot pull price below the range. Ditto the spike in TrAc in July, i.e., there's sufficient buying interest to keep price afloat in this range. When the process is complete is Jan '06, price rises as a result of buying interest, i.e., there has been enough liquidation of potential sellers during the accumulation phase to null their influence during the move out and up (note also that the "big volume" that one is told to expect doesn't occur until price is already 15% out of the gate). There is then a retracement, a higher high, and price chokes at 2.00. Why? Look at the next chart.
Here one can see the R created two years earlier and that the stock has been languishing for quite some time. Whether it had been under accumulation all that time or only during the latter stages of that "base" may not be as important as the question of how long one wants to lock up one's money while other opportunities pass him by. And even if he doesn't buy, how long does he have to follow this stock in order to realize a profit opportunity (other than buying it and selling calls)?
Which brings us to the third chart, which includes the time period you're interested in. In context, one can see that there is clearly something going on with that first spike that has nothing to do with accumulation. There may have been news of some sort. Or rumor. Something. But whatever buying interest there was was purely momentary; there wasn't nearly enough to sustain an upmove.
TrAc does decline, but there is no pullback in price. Price instead just hangs there in limbo. There is insufficient buying interest to push it farther (if there were, price would rise). But there is also insufficient selling pressure to push it down. At least for the time being. Finally, five bars later, there is a spike in TrAc and price closes near its low, not a good sign. On the other hand, price hits the S established in early September with no significant increase in selling pressure (if there were, TrAc would be higher). In other words, sellers, for now, are done.
As to the future, who knows? But this area has served as S for nearly three years, and falling below it would not be good. As for the "shakeout", this occurs in and below the range, and if there were one orchestrated for this, it would have occurred before the "breakout" (see the chapter on Demand/Supply).
You're in a better position than I to know what happened to create that spike in TrAc in November. But you should also re-examine your reasons for choosing this as a trading vehicle in the first place.
Note: when you say "looks healthy for further upside", you appear to be allowing your hopes to overshadow your analysis of what's in front of you. Don't worry about the future. Stay in the moment. And if you're going to use indicators, use them only to confirm whatever conclusions you've reached by studying price. In a contest between price and indicators, price wins.
Db
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