How do you calculate accumulation? (April 26, 2004)
Accumulation is based on a pretty straightforward premise. During a stock's life it will rally and rest, rally and rest. Sometimes it rallies a long time with just a few short rests, and then slips into a deeper sleep (some would say coma). You see this all the time: a stock breaks out from one of these deeper sleeps and runs higher, making periodic pullbacks to the 10 or 18 day EMA. After 4 or 5 of these it slips to the 50 day EMA. If it is really strong it rebounds and starts right back up, using the 10 and 18 day EMA as support for another run. If it cannot resume that move after the 50 day EMA test it often falls into another more extended base where it builds for the next breakout or a further breakdown.
That is where accumulation counting comes in. During one of those longer slumbers, a.k.a. a base, big money is either quietly buying the stock or is selling it. Bases can last from 6 to 7 weeks on up to a year or more. What we look for during the base is generally positive price/volume action where the weeks that the stock posts a gain on rising volume outnumber the weeks where the stock loses ground on rising volume. We look for bases where the accumulation is positive (more up weeks on rising volume than down weeks on rising volume). The bigger the up to down ratio, the better.
We also look at the price/volume action in general on a daily basis. Volume typically is high as the stock falls into the base, correcting back after a solid run. Then as the stock levels off and moves laterally, volume dries up relative to the selling volume. Ideally you want to see a lot of below average volume sessions. Then when it starts back up toward the former high you want to see volume start to swell. Often a base does not start to show positive accumulation until this stage. If it already shows good accumulation before this starts, that is very positive.
We also look at where the base forms. If it forms over key support such as the tops of a prior base, that is very good; that shows those longer term holders as using that level to buy more shares. The 50 day EMA is another very good support level for a base to hold as it forms; insitutions often use this level to add to shares, and if they hold it over that level during the base that is a sign of strength. Couple that with solid accumulation, and you have the making of a good base that can give rise to a strong breakout and run higher up those short term moving averages.
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