Why Analyze Price, Stock Volume, & Accum/Dist Indicator Combined? - Candlestick Patterns Explained by TechniTrader®

Identify Stock Market Participant Groups by Price & Indicator Patterns

The StockCharts.com indicator Accum/Dist was designed to help track the large-lot versus small-lot activity. Decades ago, when the concept of distinguishing between the large lots versus the small lots started being discussed by the Sell Side Institutions, the Stock Market was an entirely different Market Structure. Almost all orders back then were filled on the exchanges via Market Makers.

See the stock chart example below.

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There were Mutual Funds but no Pension Funds in the Stock Market. In addition, the number of Stock Market Participant Groups was 5, not the 9 there are today in the Stock Market, so interpretation of this indicator was simpler. Now, each of the 9 Stock Market Participant Groups have different stock order types, venues, order sizes, agendas, and a vast disparity of information available to them. By the time the retail crowd gets the news, it is old news to just about every other Stock Market Participant Group.

When analyzing a stock using the Accum/Dist indicator, you MUST use Relational Technical Analysis™ because it is more complete. This type of analysis combines the Stock Price via Candlestick Patterns and Trend and Trendline Patterns, as well as the stock Volume and Accum/Dist indicators.

If you want to use Accumulation Indicators, you need to approach their use properly for the current Stock Market of today. The footprint of each different Stock Market Participant Group is in the combination of these on the chart and can be found in Price, stock Volume, and the StockCharts.com Accum/Dist indicator.

Price shows the magnitude of the daily Price action. For example, was Price contained and controlled via Time Weighted Average Price (TWAP) orders, or were High Frequency Traders (HFTs) creating huge candlestick Price action? Each group has its own candlestick amplitude that it creates, which is often deliberately based on the stock buy ORDER TYPE they prefer to use and the VENUE they typically use.

The Trend and Trendline Patterns tell you who is trading OR investing in the stock. Dark Pools are not found in stocks that are topping; rather, they are found in Bottoming Candlestick Patterns in the Dark Pool Buy Zones™.

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Stock Volume defines the quantity of orders flowing through on any given day. The giant Buy Side Institutions deliberately use Time Weighted Average Price orders which fire off over a longer period of time, usually several days to weeks. So, their gigantic quantities of accumulated shares are spread out, lowering stock Volume rather than spiking it. The High Frequency Traders spike stock Volume. Professional Traders ease stock Volume above its average to entice Retail Traders into the stock. Smaller Funds tend to surge stock Volume.

Dark Pool Quiet Accumulation is a consistent buying pattern over time. One day of Accum/Dist does not provide sufficient analysis.

Using the stock chart provided as an example of how to interpret downward action, there is a gap down at market open, a stock Volume spike, and then a sudden severe Angle of Descent™ on Accum/Dist which is an HFT footprint. The trend tells us that prior to this, Professional Traders moved Price up but took profits as the stock formed a short-term top due to their profit taking into Retail Traders buying earlier. Their profit taking awakened the High Frequency Traders.

So, that pattern in combination tells us that this is NOT Dark Pools or Professional Traders, but High Frequency Trader action. Over the next few days, the stock runs down on Smaller Funds’ Volume Weighted Average Price (VWAP) orders, which trigger any time there is a huge stock Volume spike. The spikes in stock Volume are always created by High Frequency Traders.

The two green rectangle boxes drawn on Price show the Dark Pool Buy Zones on this stock chart. See the large black candlestick on the right side of the chart and its long tail. This large black candlestick and long tail has a “spiking stock Volume bar”, which indicates that this is caused by High Frequency Traders attempting a big sell down day. However, this attempt fails to sell the stock down, as the Dark Pool Buy Zone triggers Time Weighted Average Price orders of the giant Buy Side Institutions, which move Price up along with the Professional Traders’ intraday buying.

The second large black candlestick is caused by Smaller Funds’ Volume Weighted Average Price orders selling the stock down again. They are unaware that they are selling into a Dark Pool Buy Zone which is clearly defined in the chart using Relational Technical Analysis of Price, stock Volume, and the Accum/Dist indicator. The Professional Traders move the stock out of the Dark Pool Buy Zone, even as Smaller Funds continue to sell.

Summary

In order to use the Accum/Dist indicator properly, you must know what Price, stock Volume, and Accum/Dist Pattern each Stock Market Participant Group creates on the chart. Just seeing Accum/Dist tick upward does not tell you enough because you have no idea who ticked it up. The time of year also has an effect on charts because the giant Buy Side Institutions prefer to accumulate in the summer and many Retail Traders are on vacation with most of them thinking it is a bad time to trade stocks.

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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 & Option Courses