Thoughts, Trading

Tight Closes May Not Necessarily Mean Accumulation

Tight closes or prices within a narrow range does not necessarily imply accumulation, contrary to IBD teachings. The situation can result from two scenarios:

  1. With high volume where buyers and sellers are busy fighting / transacting.
  2. With average to below average volume where buyers and sellers are taking their time to accumulate / unload.

Scenario #2 is the riskier scenario as both sides have not “shown their hands”, and the fact that they did not may mean that they have a much larger position to accumulate / unload. While it may seem on the tape to be accumulation (i.e. absorptions at bid and taking of asks), you have to ask yourself why there is a continuous stream of stock being sold to be accumulated. Similarly, it may seem on the tape to be distribution (i.e. taking of bids and absorptions at asks), again you have to ask yourself who is continuously accumulating. The point is, you can only know which way it would resolve itself after one party exhausts their supply / demand and the stock finally moves out of the bracket.

You want to go with the winner, and the winner can only be determined after the buyers and sellers have fought seriously and the stock has broken out of its consolidation range convincingly.

Scenario #1 will be resolved quicker than Scenario #2, hence in terms of frequency of monitoring, Scenario #1 situations should be monitored more closely.


No comments yet.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Copyright © 2005-2014 All Rights Reserved.

Enter your email address to follow this blog and receive notifications of new posts by email.

Blog Stats

  • 399,206 hits
%d bloggers like this: