The waiting game: #Accumulation The accumulation phase is typically the longest phase a security goes through. During this period, its price neither rises nor declines meaningfully. Instead, its price moves sideways through time. Supply and demand are roughly in balance, and institutional managers or smart money often accumulate shares of an undervalued security. (Smart money is typically institutional dollars that are informed by extensive research.) Volume is usually light, reflecting a general consensus that the security’s price is correct. Buyers are unable to push prices higher than a ceiling (a resistance level), whereas sellers are unable to push prices below a floor (a support level). You can’t know in advance with any precision where these ceilings or floors will be found. You can easily identify them, however, by viewing a price chart and looking for price levels that a security is unable to climb above or fall below. These support and resistance areas are usually driven by fundamental reasons. For example, Microsoft’s stock may not be able to rise above $35 per share because that movement represents a valuation of $300 billion, and market participants may not feel the company is worth more than $300 billion. Thus, support and resistance levels vary by security and can’t be determined until you examine a price chart. Think of an accumulation phase as a period where most market participants agree on a security’s value. Because price isn’t moving dramatically, profiting off of securities in the accumulation phase can be difficult. Some swing traders may buy at or near the support level and attempt to sell at the resistance level. This approach only works, of course, when the distance between the support and resistance level is sufficiently wide enough to make the profit worthwhile. It also only works as long as the security continues to trade in the range. If you swing trade trends, you want to look for securities moving out of the accumulation phase and into the expansion phase. However, if you swing trade ranges, you may be content to find accumulation phases and trade them until the security ends its accumulation phase. You can spot accumulation phases on charts of varying time periods. Although accumulation phases are traditionally thought of as occurring over several months, a security can technically be accumulated over a few days. The key factor is time frame. A day trader, for example, looks at intraday charts where each plot represents a five- or ten-minute interval. For day traders, accumulation phases may occur over a two-day period. #digest
Posted on: Fri, 26 Dec 2014 13:15:39 +0000