How Accumulation and Distribution Affect Stock Prices

Category: Blog

Stock trading tips and explanations for Most Excellent Investor members area.

Posted on

How Accumulation and Distribution Affect Stock Prices

Since stock market prices fluctuate on phases of supply and demand investors can trade securities to capitalize on these market price movements. Informed investment decisions based on precise price movements depend on understanding the concepts of accumulation and distribution. These phases of market behavior can help investors identify potential trends and make strategic moves to make a profit. In this article, we will identify what accumulation and distribution, explore their significance, and suggest strategies for using them to individual investor advantage.

Identifying Accumulation

Accumulation refers to a phase in the market cycle when institutional investors, such as mutual funds, pension funds, and hedge funds, begin accumulating stocks or other securities. During this phase, informed market participants believe that the prices of certain stocks are undervalued or have the potential for future growth.

Accumulation can occur after a prolonged downtrend, when investors see an opportunity for a potential reversal. Institutions and savvy investors accumulate stocks during this phase, gradually increasing their holdings. Their actions create demand, leading to a steady rise in prices.

Key Indicators of Accumulation

Volume - Increasing trading volume is often a strong indicator of accumulation. Higher volume suggests increased market participation, signaling institutional buying.

Price Stability - During accumulation, prices tend to stabilize or form a base, indicating that buyers are supporting the stock at a certain level. This consolidation phase often precedes a potential upward move.

Positive News Flow - Accumulation is often accompanied by positive news or events that suggest the stock's potential growth. These catalysts can attract institutional interest and encourage buying activity.

Strategies for Accumulation

Identify Fundamental Value - Conduct thorough fundamental analysis to identify undervalued stocks with strong growth potential. Look for companies with solid financials, a competitive advantage, and a positive outlook for the industry.

Technical Analysis - Utilize technical indicators and chart patterns to identify accumulation phases. Look for consolidating price patterns, increasing volume, and signs of buying pressure.

Patience and Gradual Buying - Accumulation is a patient strategy. Gradually build your position over time, taking advantage of price dips and consolidation periods. This approach minimizes the impact of short-term market fluctuations.

Identifying Distribution

Distribution is the opposite of accumulation and occurs when institutional investors begin to sell their holdings. It typically happens after a prolonged uptrend, when investors believe that a stock is overvalued or when they anticipate a market decline.

During distribution, institutions and informed investors gradually sell their positions, creating selling pressure and reducing demand. This can lead to a decline in stock prices.

Key Indicators of Distribution

Volume - Increasing trading volume during a downtrend suggests distribution. Higher volume indicates a surge in selling pressure and signals that institutions are offloading their holdings.

Price Weakness - Stocks experiencing distribution tend to exhibit weak price action, with lower highs and lower lows. This indicates a loss of buying interest and the potential for a downward trend.

Negative News Flow - Negative news, disappointing earnings reports, or adverse events can trigger distribution. Institutions may use such catalysts as opportunities to sell their positions.

Strategies for Distribution

Set Price Targets - Establish realistic price targets for your investments based on fundamental and technical analysis. Consider selling when the stock reaches your target or shows signs of weakness.

Trailing Stops - Utilize trailing stop orders to protect profits during distribution phases. These orders automatically adjust the sell price based on the stock's performance, allowing you to capture gains while limiting potential losses.

Diversify Your Portfolio: Spread your investments across different sectors and asset classes. Diversification helps mitigate the impact of a single stock's distribution on your overall portfolio performance.

Bottom Line

Accumulation and distribution are integral phases of the stock market cycle that can provide valuable insights into the actions of big smart money stock investors and potentially help individual traders move in conjunction with the smart money that is moving the market. Quick identification of stocks being accumulated or distributed is key to maximizing profits. Most Excellent investor members have access to watchlists made up of stocks in both phases aggregated so that quick decision making can occur for buying or selling.  Sign up now.

Posted on

Understanding Stock Market Accumulation and Distribution

The stock market is a dynamic ecosystem where prices fluctuate based on the forces of supply and demand. To navigate this complex landscape, investors employ various strategies to maximize their returns. Two crucial concepts in stock market analysis are accumulation and distribution. These terms describe the actions of institutional investors and provide valuable insights for individual traders. In this article, we will delve into the meaning of accumulation and distribution, explore the indicators used to identify these phases, and discuss strategies investors can adopt to capitalize on them.

What is Accumulation?

Accumulation refers to the phase in which large institutional investors, such as mutual funds, hedge funds, and pension funds, are actively buying shares of a particular stock or asset. During this phase, the demand for the stock exceeds the supply, leading to an upward price trend. Accumulation often occurs after a period of decline or consolidation when smart money investors perceive the stock to be undervalued.

Identifying Accumulation

Several indicators can help identify the accumulation phase. One common indicator is the volume, which measures the number of shares traded in a given period. In an accumulation phase, trading volume tends to increase, reflecting the higher activity of institutional investors entering the market. Additionally, technical analysis tools like the on-balance volume (OBV) indicator can help detect accumulation. The OBV measures the cumulative volume flow in a stock, and when it rises, it suggests increased buying pressure, signaling accumulation.

Strategies for Accumulation

For individual investors, identifying accumulation can present an opportunity to align their positions with institutional investors and potentially benefit from the price appreciation. Some strategies to consider during the accumulation phase include:

Trend Confirmation: Confirming the stock's upward trend through technical analysis can help investors validate the accumulation phase. Tools like moving averages or trend lines can provide insights into the stock's overall direction.

Breakout Trading: Once the accumulation phase is confirmed, investors may look for breakouts, which occur when the stock's price surpasses a resistance level. Breakouts can signal a potential continuation of the upward trend and provide entry points for traders.

What is Distribution?

Distribution is the opposite of accumulation and occurs when institutional investors start selling their shares. This phase typically follows a prolonged uptrend in the stock's price, as institutions capitalize on their gains. As the supply of shares exceeds demand, the stock's price may start to decline.

Identifying Distribution

Similar to accumulation, identifying the distribution phase relies on various indicators. Increased trading volume, particularly when accompanied by declining prices, can indicate that institutional investors are offloading their positions. Technical analysis tools like the relative strength index (RSI) can also help identify overbought conditions, suggesting a potential distribution phase.

Strategies for Distribution

Investors should exercise caution during the distribution phase, as the stock's price is likely to decline. Strategies to consider during this phase include:

Trend Reversal Confirmation: Confirming the stock's reversal through technical analysis can help investors avoid further losses. Tools like trend lines, moving averages, or chart patterns can help identify potential trend reversals.

Short Selling: Sophisticated traders may consider short selling during the distribution phase. Short selling involves borrowing shares from a broker and selling them with the expectation of buying them back at a lower price in the future. This strategy allows traders to profit from a declining stock price.

Conclusion

Understanding stock market accumulation and distribution is essential for investors looking to make informed decisions. Identifying these phases can provide valuable insights into the actions of institutional investors and potentially help individual traders align their positions with smart money. By utilizing technical analysis tools and following appropriate strategies, investors can increase their chances of capitalizing on the opportunities presented during the accumulation and distribution phases.

Posted on

Make Stock Market Volatility Work for You

How To Make Stock Market Volatility Work for You?

Stock day traders actually want stock market prices to make big moves. A stagnant market where prices don't move or move in very small increments means that money invested in such a market is "dead money".

When stock prices are volatile even a stock with a price that ends down from the prior day can make winning moves during the current trading day (intraday) before ending down at the end of the day. An investor buying a stock close to its intraday low and then selling it after the price rises intraday can make a profit. The trick is finding stocks with such a trade set up.

What are the characteristics of a profitable intraday stock?

Volatility over multiple days backed by sufficient volume that shows there is trader interest in the stock. The volatility has to be over multiple trading days with moderate to big price movement taking place during each trading day. The research to find such stocks is already done for you on the watchlists in the Most Excellent Investor membership area.

The psychology needed to trade a volatile market?

Even after finding volatile stocks that meet the criteria for volume a trader needs to have the "guts" to buy into a stock position and hold that position long enough for the price to rise during the trading day. Because after buying a stock at what can be considered a comparatively low price that price can drift even lower before rising above the purchase price. Check out the case study of the stock below from March 23, 2022.

Case study profitable intraday winning stock: Lizhi Inc. (LIZI)

Make stock market volatility work for you
Intraday winning chart for end of day losing stock

Buying stock symbol LIZI at 9:34 AM on March 23, 2922 for $1.78 would earn a profit of between 1.8% - 9.5% if sold anytime between 9:38 AM and 11:56 AM. A profit of between 3.5% and 8.4% could be made if the position was closed (sold) anytime after 11:56 AM.

Every day there are dozens, if not hundreds, of stocks that trade with sufficient volatility like the case study shown above. With proper stock research and trader mentality a volatile market will make opportunity for big profits!

Posted on

Combat Stock Trading Company Limitations That Anger Investors

What happens when an investor sets up a profitable trading strategy but the trading company platform (think Robinhood) limits functionality (trading options) for the particular stock being traded? A potentially profitable trading strategy can lose money because volume is an important part of the trade set up and if purchasing of shares is being limited by the trading platform then entering and exiting a trade is hindered before a profit can be taken. As the saying goes, you make money when you buy so the decision to buy and the amount of shares to buy is key.

Recently when the idea of trading shares of GameStop  (GME) went viral it caused so much volatility that some trading platforms like Robinhood placed limits on trading the stock. That angered investors trading on Robinhood due to the fact that a sufficient amount of shares in GME could not be bought that would allow for sufficient profit in the intraday price moves that the stock made. How can traders combat such moves made by stock trading company platforms?

The best way of combating limits placed on trading in specific stocks is to find another stock to trade. Too simplistic? Not hardly. There are thousands of stocks that trade on the U.S. stock exchanges everyday. Many stock traders and investor focus on the price movement of the 30 stocks in DOW. But the DOW Jones stocks are only representative of their respective sectors not of every stock in the sector. If the market (DJIA) is down for a given trading day there are many individual stocks, dozens at minimum, in the broader market that are up for the day.  The same is true for sectors that may be down, there can still be stocks within the sector that are up for the day. The key is to find one of these stocks and trade it.

When a stock receives unexpected interest from a lot of investors, whether retail or professional ones, the volume created in trading it can overwhelm a trading platform used to trade the stock's shares. Clearing all the trades (which is a different subject for a different article) can be problematic for a trading company since the amount of floating shares for the volatile stock may be limited. This may cause a problem for a trading company with limited shares to obtain shares for all investors who wish to purchase them.

Stock traders and investors want to be able to readily buy and sell stocks that are making big price moves so that a profit can be captured quickly. If everyone is limiting their attention to trading the same stock then share availability may be impacted and limitations by trading companies will result.

Since the US stock markets are the most liquid in the world there are always opportunities to be made outside of the viral stocks being traded. Profitable intraday trading happened for more stocks than GameStop when it was red hot. The way to combat the limitations were placed on GameStop, and other stocks, with limitations,  is to find highly traded and profitable stocks that don't have limitations placed on them. There are respectable stock research sites (like this one) that can help you identify stocks with high interest (measured in volume) along with volatility (measured in price movement). Trading in diversified profitable stocks that don't have limitations (yet) allow for quick profits  to be made smoothly.  Happy trading!

Posted on

Determine Where You Will Invest, Is It Easy Or Hard?

What To Invest In

There are several different types of investments, stock market,  real estate, artwork, and there are many factors in determining where you should invest your funds.

Determining where you will invest begins with researching such things as, the various available types of investments, determining your risk tolerance, and determining your investment style – and your financial goals. The most liquid and diverse place to invest in is the stock market.

Stock Research Importance

If you were purchasing a new car, you would do quite a bit of research before making a final decision on your purchase. You would never purchase a car that you hadn't fully investigated and taken for a test drive. Similarly, investing in stocks works much the same way.

Learning about the stock market and the individual stocks in it takes a lot of time… time well spent of course. There are numerous books and websites on the topic, and you can even take college level courses on the topic – which is what stock brokers do.

Stock Research Shortcut

Does researching stocks have to be time consuming? With access to the Internet, you can actually research stocks, play the stock market with fake money to get a feel for how trading works and see if you can make money at it.

You can make pretend investments by searching for ‘Stock Market Games’ or ‘Stock Market Simulations.’ on any search engine. But how do you choose which stocks to "play with"?  You can fake trade but you can't fake research. Or can you?

No you can't use fake research to trade stocks, but you can take a shortcut. Let someone else do the research for you. That's how financial analysts and consultants make their money. But rather than interview or research analysts you probably would rather spend your time researching stocks you can buy.  A better shortcut is to use stock research already distilled into a list of the stocks that seem most promising based on the research already done by others.

Stock Watch Lists

Stock watch lists is what this website compiles for its members to refer to when they are buying and selling stocks. If you want to be an independent investor you will want to pull the trigger on your own trades and buy and sell according to your own preferences and tolerances for price movement.

Check out the watch lists in our member's area. Buy the stocks listed at the approximate time shown on the watch list and sell when the price rises to a point where you make the profit you desire, then sell the stock. For stock day traders this buying and selling can take place multiple times throughout the trading day, with the same stock or with different stocks. Financial planners don't recommend this type of investing because there is the danger of inexperienced traders losing money instead of making money.

If day trading stocks is too much risk for you then you should speak with a financial planner. Tell him or her your goals, and ask for their suggestions – this is after all what they do! A good financial planner can help you determine where to invest your funds, and help you set up a plan to reach all of your financial goals. Many will even teach you about investing along the way.

For just a dollar you can try using our watch lists produced daily for each hour of the trading day to pick stocks you want to trade. You'll have time to "paper trade" (fake trade) using one of the simulators you can find as mentioned previously in this article. Quite quickly, and cheaply, you can see whether day trading stocks using our watch lists will work for you.

Posted on

Stock Trading For Beginners

How Do I Trade Stocks As A Beginner

Some may say if you are a beginner you shouldn't be trading stocks. But that sentiment ignores the fact that even current expert stock traders began as a beginner.  Whenever you decide to make your first trade you are by definition a beginner. But "beginner" doesn't have to equate to "dummy".

Obstacles For Beginner Stock Traders

It's easy to see how good or bad news about a company can make its stock price rise or fall.  Everyone will avoid the stock of a company with bad news. But it may take some time to learn about how volume, moving averages, moving average convergence and divergence, resistance levels, and support levels affect the  price of stocks. You can add to that the effect of interest rates, the economy, politics, and other factors to confuse things even more. So a beginner will have to take some time to become educated. An educated beginner can become successful fairly quickly as a stock trader, but that education need not take years.

Beginners Can Start With An Advantage

A well equipped beginner can also become successful quickly. Equipped how? With tips and a head start. Money is made as a stock trader by finding stocks that can be bought at  a low price and sold later at a higher price (buy low, sell high - no duh). Where are the stocks with a low price - relatively speaking - and relative to what? Well, winning stocks, the ones that can be bought low and sold higher later, are everywhere in the market, even on days where the market is down. Timing is what matters. Most successful stock traders subscribe to services that spotlight stocks ready to pivot and make a move. (The article you are reading now appears on such a service (this site)).

The Most Excellent Investor Advantage

Some stock traders prefer a service based on news or earnings fundamentals, others prefer technical trading indicators, many prefer both. This site spotlights stocks in watch lists based on a combination of technical indicators that signal that a stock is relatively low compared to the market in general, stocks in its sector, or to itself, and indicators signal the stock has enough interest from the market that it is ready to pivot up in price. Starting stock research with a watch list can give a trader a head start. The remaining activity is to check for news about a stock to make sure that there isn't any bad news that would make the relatively low price more expensive based on new risk.

To allow time to become familiar with using our stock watch lists all Most Excellent Investor membership levels begin with a seven day free trial period. During this trial period allows time for daily back testing and paper trading putting no money at risk.

With at least some education and the head start that our watch lists can give a beginner can mean less stress in becoming a successful trader.

Happy trading.

Posted on

Can I Really Make Money Day Trading?

How To Trade Intraday For Profit

Buying at the right price and then selling at the right time is the way to make money day trading in the stock market.  Strange as it may sound money can be made intraday on a stock that loses money day to day, and the reverse is also true. Money can be lost intraday on a stock that makes money day to day.

Intraday Profitable Case Study - Fortress Biotech, Inc. (FBIO)

Proof for the statement above is seen in the 10-20-2020 trading chart for Fortress Biotech, Inc. (FBIO). A long stock position taken by buying FBIO at 9:34 a.m. at $2.58 could make a profit if sold intraday at 10:06 a.m. at $2.65. That trade would yield a gain of 2.7% in the span of only 32 minutes. There was over 69,000 shares of FBIO traded in the 32 minute timeframe mentioned above. Those 32 minutes was not the only intraday profitable timeframe for a position taken at 9:34 am, at 1:17 pm the price hit $2.65 again so there was a second chance intraday.

Further Money Making Intraday Opportunities

If profit was taken on the FBIO 9:34 am position even more money was available to be made by buying again at 10:44 am at $2.51. Another 4% gain could be made selling FBIO at 11:09 am at $2.63 which is a time span of only 25 minutes.

So by identifying and trading one stock intraday a greater profit can be made in minutes than a bank will pay on a savings deposited for a year.  So the answer to the question "Can I really make money day trading" is a definite YES!

Note: The FBIO 9:34 am entry entry point was identified on the MostExcellentInvestor.com 9:30 am - 10 am watchlist in the subscriber area.

Posted on

What The Largest Stock By Dollar Volume Amazon (AMZN) Tells Trader’s About The Market

Does high dollar volume always mean rising price momentum? Of course not. Case in point is Amazon that actually has a price that has been trending down.  Check out the Friday 10-16-2020 1 day chart below:

Amazon (AMZN) 1 Day Price Chart
From Yahoo Finance

Subtly this stock is trending down if you look at its 5 day average.  Other high dollar volume stocks that are trending up instead of down are Apple (AAPL), Microsoft (MSFT), and Nvidia (NVDA). The trend up or down for these high dollar volume stocks can be long  and slow to build. Patience is needed, and they are worth investing in (holding for a long time) and are not good for trading (selling quickly).

On the other hand stocks that are good for trading are usually small cap stocks like JAKKS Pacific, Inc. (JAKK), and Ocean Power Technologies, Inc. (OPTT). Small caps like these two stocks can be traded for a good gain intraday. If the right entry point is entered then even if ultimately the stock drops in price by end of day a profitable exit point can be found.

Note: The entry entry point for JAKK and OPTT was identified on the MostExcellentInvestor.com 9:30 am - 10 am watchlist in the subscriber area.

 

Posted on

Why Does Stock Price Momentum Reverse?

Stock Price Momentum

Momentum is good while it's moving in the direction of the trend that you want to capitalize on. If you are long on stocks (meaning you want to buy them first then sell them when the price is higher) then you are looking at rising price momentum and want to capitalize on stocks with prices that will move higher after you buy them. But we all know, or learn soon, that momentum doesn't continue in the same direction forever ("trees don't grow to the sky"). At some point momentum will change.

What causes Momentum To Slow Or Even Reverse?

The answer is friction. A car rolling without engine power may have enough momentum to keep it rolling for a while after the engine stops. But it will come to a stop because of friction. The surface of the ground rubbing against the tread of the tires will slow and eventually stop the wheels from turning which will bring the car to a stop. If there is an incline such as the car was going up a hill when the engine stopped then when forward momentum stops then the car will start falling back down the hill when all of the momentum is exhausted.

Stock prices are like the car in the example above. Just like a car under engine power can overcome an uphill incline, so a stock's price can move higher even if the market is falling. The opposite is true too. When the market is risinig even a stock with a price that had forward momentum (rising prices) can run into friction and the price can begin to drop even while the market is rising.

What Kind Of Friction Slows Stock Price Forward Momentum?

The biggest source of friction for stock prices is bad news. News about the market in general can be bad, or it can even be bad news specific to one stock (hopefully not your stock). Bad news can put the breaks on forward stock price momentum and send it into reverse. Backward momentum can be shockingly worse than previous forward momentum. "Stock prices take the stairs up, but the elevator down" is a saying that is familiar to most trades because it is great picture for an absolute reality.

Bad earnings surprises, a competitor's better product offering, and key negative changes in leadership within the company are all things that cause friction for a stock's price and may cause it to slow or reverse downward. Some of these things can not be known ahead of time by the general public. That's why advanced analytics on key indicators are essential to have. There are analytics that can tell you how a stock compares with its peers, the direction and strength of its price momentum, where the ceiling (resistanct) and floor (support) is likely to be. Compiling and examining the analytics that reveals the foregoing information for a stock can be time consuming but is worth it.

Want a shortcut for your stock trading research?

That is what membership to this website is all about. Giving traders the best stocks to watch and approximate times to trade them.

 

Posted on

If stock trading is so easy why do I keep losing money?

Asking this question is something that many new stock traders do too often. After all, no one gets into trading stocks to lose money. But it happens. Until a you find a winning strategy.

What winning strategies you ask?

One of the most popular strategies is called momentum trading where a trader looks for stocks with a rising price on rising volume. Doesn't that mean this is a good stock because more and more investors are interested in it? Maybe but not always.

More and more investors may get interested in a stock because the company behind the stock has a good story. A stock may have a good story that hits the news and draws the attention of investors based only on the sensationalism of the story. If it's a short story then the price of the stock can come crashing down. Usually this is because the stock price was based only on the story no viable product (viable meaning product that makes money).

Rather than trying to ride a stock that is already rising due to a great story it's better to find a stock with a price that will begin rising soon, and get in before the rise. How do you find those stocks. Believe it or not there are foot prints to follow. How to do that will be in the next post.

Note: Most Excellent Investor subscribers get access to watchlists that contain multiple stocks per hour.