AccumulationandDistribution

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W
anderingthroughNetLandrecently,Iheardtheplaintivecriesofafellowtraveler,wailingthathis
indicatorshadonceagainbetrayedhim."Howcouldthestockhavegoneup?"hesobbed."MACDwas
negative!The12dayROCsaidSell!Theborogrovesweremimsy!"Youhearthisstuffalot.Another
investormoans"Howcanthemarketbemakingnewhighs?We'reina3CWave!"Itsortofremindsmeof
thosepeoplewhotrytounderstandbrainfunctionbyfeelingthebumpsonsomebody'shead.Seemstome
thatifyouwanttounderstandhowthebrainfunctions,youstudythebrainandwhatmakesittwitchand
shudder.Ifyouwanttounderstandhowthemarketfunctions,youstudythemarket,notmarketindicators.

T
echnicalindicatorsarethehightechequivalentoffeelingthebumpsonthemarket'shead.Sincethese
indicatorsareoftenvagueandmuddyatbest,anyonewhoclaimstohaveanybutthemostsuperficial
understandingofthemcangaingreatprestigeandstatus.Hecancloakhimselfinarobeembroideredwith
theDojiStar,theBlackCrowandtheWhiteSoldierandinvoketheDetrendedPriceOscillator(shippingand
handlingextra).Butjustastossingthevirginmaidenintothevolcanohadonlytangential
relevancetothereturnofspring,thebehavioroftechnicalindicatorsusefulthoughtheymaybeunder
certaincircumstancesbearsonlyatangentialrelationshiptothebehaviorofthemarketorofanindividual
stock.Toseetherelationship,infact,youhavetolookoutofthecornerofoneeye.

A
lltechnicalindicatorsarebasedonpriceand/orvolumebehavior,usuallyboth.Onemightsurmise,
therefore,thattogetattherootofallthis,oneshouldstudytherelationshipofpriceandvolumeinaddition
totheproperuseoftechnicalindicators.Maybeinsteadoftechnicalindicators.Butyouwouldn'tbegoing
farenough.Priceandvolumebehaviorarefurtherdependentontherelationshipbetweensupplyand
demand.Therefore,inordertomakeconsistentlyprofitabletrades/investmentsoverthelonghaul(perhaps
eventheshorthaul),itisabsolutelyessentialthatyouunderstandhowtherelationshipbetweensupplyand
demandaffectswhathappenstoyourstock.Usingtechnicalindicatorsasashortcutthroughthislandscape
isliketryingtodriveacarwithoutfirstunderstandingthefunctionsofthesteeringwheel,thebrakepedal,
andtheaccelerator.

I
nanutshell,whendemandisgreaterthansupply,pricesgoup.Whensupplyisgreaterdemand,pricesgo
down.Soundssimple,doesn'tit?Anditissimplewhencomparedtosomethinglikegenesplicing.Butas
simpleasitmaybe,itneverthelessconfoundsmanyinvestorswhoaredesperatelytryingtodetermineif
theirstockisgoingtogoup,whenit'sgoingtogoup,andbyhowmuchit'sgoingtogoup(ifitgoesupat
all),andwhethertheyshouldbuymoreandifsowhen,ortaketheirprofits(ifany)andheadfortheexits.
Let'sturnonafewlights,then,bygoingbacktothebeginningandwalkingthroughtheprocessof
determiningsupplyandcreatingdemandstepbystep.

Accumulation
AswiththepriceofredbellpeppersinJanuary,ifalotofpeoplewantsomethingandthereisn'tmuchofit,
it'sgoingtocostmorethanifthere'salotofitlyingaroundandnobodycaresmuch.Ifthereareveryfew
sharesavailablefortradeandalotofpeoplewantthemandarewillingtopaythroughthenoseforthem,
thesharesaregoingtocostmorethaniftherearegazillionsofsharestobehadandeverybodycanhaveas
muchastheywantandthensome.Manyinvestors,noviceandotherwise,interpretthistomeanthatthey
shouldandmustfocusoncompanieswithalow"float"(sharesissuedbythecompanyandnotownedby

insiders,thereforeavailablefortrade)inordertoincreasetheoddsthattheirstock'spricewillrise.

I
nasense,theyareright.Giventherequisitedemand,thefewertheshares,thehigherthepremiumthey'll
bring.Alowfloat,however,isnotalwaysthekeyinandofitselftorapidpriceappreciationandinvestment
success.Momentuminvestors,particularlydaytraders,canandoftendodrivethepricesoflowfloator
"illiquid"stocksupratherquicklyanddramatically.ButasseenduringthecurrentInternetphenomenon,
smallfloatscanturnoverseveraltimesinadayasaresultofdaytraderactivity,andpricescanplummet
justasquicklyandjustasdramaticallyastheyrose,soquicklyinfactthatone'sstopmaynotbetriggered
untilthepriceiswellbelowtheintendedstoplevel,andthoseextraordinarygainscanevaporatelikea
PopsicleinJuly.

E
venso,thissituationisperceivedbymanytobeamoreattractivesituationthanthatinwhichinstitutions
ownalargepercentageofthestock,whetherthestockoriginallycamefromalargefloatorasmallone.
Thefearisthatinstitutionaldumpingcandrivethepriceofastockdownwardsoquicklythatonedoesn't
havetimetoreact.Andinstitutionaldumpingcandrivedownpricesfasterthanyoucanimagine.Butifyour
stockisplummeting,yourbrokerageaccountdoesn'tcarewhetherit'sbleedingbecauseofinstitutional
dumpingordaytraderdumping.Dumpingisdumping.Bleedingisbleeding.
Nonetheless,thesecautionarystatementsdonotalterthefactthatasmallnumberofsharesispreferable
toalargenumberofsharesifyouwantthebiggestbangforyourbuckintheshortestamountoftime.A
lowfloat,however,canbetheresultnotonlyofthesharesneverhavingbeenissuedinthefirstplace,but
alsooftheprocessofaccumulation(callitapracticallowfloat,astheendresultreducingthenumberof
sharesavailableforpurchaseisthesame).

A
ccumulationistheprocesswherebyaquantityofstockisacquiredatthelowestpossibleprice.Itisnot
throwingmoneyatarocketorevenabreakout.Itisasubtle,sophisticated,andslyefforttoamassastake
thatislargeenoughtonotonlymakethenextphase(the"markup"phase)worthwhile,butalsopossible.
Themarkupphasebecomespossiblebecausethenumberofsharesavailablefortradehasbeenquietly
reduced,andwhenthedemandforthosesharesincreases,thepriceschargedforthemcanbeincreasedas
well.Inotherwords,aswithdiamonds,theremaybealotofthem,butthey'rereleasedintothe
marketplaceincontrolledamountsinordertokeepthepriceartificiallyinflated(stocks,likediamonds,are
worthonlywhatpeoplearewillingtopayforthem).
Theaccumulationprocesstakesplaceinwhatiscalleda"congestionarea",asidewaysmovementofthe
stockinwhichpriceshowsnoinclinationtotakeoffeitherupordownandisaccompaniedbyconsistently
lowvolume(seeBases).Thelowvolumepartisimportant,aslowvolumelevelsarecharacteristicof
indecision(ifpeoplewereconfidentinadecisiontobuyorsell,they'ddoso,andinbiglotstoo;when
volumeishigh,everybody'sbeingdecisivetheyjustdon'tnecessarilyagreeonwhetherthestockshouldbe
propelledhigherordrivenlower).Lowvolumecanoccurincongestionareasthatarepartofuptrendsorit
canoccurincongestionareasthatarepartofdowntrends.Ineithercase,thedeterminingcharacteristicof
thepatternasitrelatestoaccumulationordistributionistheindecisionwithinthepatternitselfasto
direction,notnecessarilythepriordirection,foronecanneverbereallysureinwhichdirectionthestockis
goingtobreakoutexceptinhindsight.

S
ohowdoyouknowwhetherthestock(orwhatever)isbeingaccumulatedorbeinggraduallyand
surreptitiouslydumped?Rememberfirstofallthatwhenastockisbeingaccumulated,itisstoringupthe
forceofdemandthatwillbethepowerbehindasubsequentupwardmovement.Thisaccumulationtakes
time,andthatdoesn'tmeanoneortwoweeks,muchlessoneortwodays(daytradingisasomewhat

differentballofwaxsincethepricetargetsaresomuchless,buttheprinciple'sthesame:youwantresults,
you'vegottobuilduptheforcetogetthem).Andnoteveryhorizontalformation,nomatterhowlongitis,
representsazoneofaccumulation.Inadditiontoabasethatislongenoughtoallowaccumulationtotake
place,youmustalsosatisfyyourselfthatsomebodyactuallywantsthisstock,andyouknowthatbythe
contextinwhichthisbaseorzoneorcongestionareaisplaced.Investorswholiketothinkthattheyare
"value"playersoftenmisstheboatonthispoint,believingthatsincethestockischeap,itisa"goodbuy".
Butifnoonewantsthestock,itisnotagoodbuynomatterhowcheapitis.

D
etermine,then,thatthisisastockthatinterestssomeone.Wherewasthestockpriortothisbaseyou're
studying?Hasthereeverbeenanyinterestinthisstockatallatanytime?Isitresting,isitasleep,orisit
dead?Whatisitsstrengthinrelationtoitsgroup?Inrelationtothemarket?Ifitisa"famous"stock,itis
clearlyindemandbysomeone,butitneednotbefamousinorderforaccumulationtotakeplace.Was
thereincreasingvolumeandhigherpricesbeforeitreacheditscurrentplateau(awelldefineduptrendis
alwaysabigplus)?Hasthestockevergonethroughasustainedadvanceatanytime,evenifitwas
followedbyasustaineddecline?Ifso,andparticularlyifyouhavereasontobelievethatanewcycleof
demandfollowedbyhigherpricesisinthecards,youmustthenevaluatethecharacterofthebase.

I
nordertoproperlyevaluatethesupply/demandrelationship,youneedabar(orcandle)chartofshowing
theopen,high,low,andcloseforeachday(OHLC),andyouneedabarchartofvolumewhichshowshow
manysharesofthestockaretradedeachday.Ifyouhavecolorcodedvolume,getridofit.Thiscoding
showsyouwhatthevolumewaslikeondaysthestockclosed"up"(usuallygreen)andwhatthevolume
waslikeondaysthestockclosed"down"(usuallyred).However,itisnotatallunusualforpriceto,for
example,closelowerthanitopened,yetclosehigherthanthecloseofthepreviousbar.Thismakesthe
volumebar"green"eventhoughthepricebarmaynotbebullishatall