Trading is a business of merchandising. As in any such business, the objective is to merchandise inventory at a price above cost. Successful traders accumulate positions at wholesale, when public interest is low. Once prices have been marked up, positions are distributed at retail to a public eager to buy.
Distribution by strong hands leaves a trail on the tape. Traders with large positions are unable simply to call their broker with an order to sell at the market, particularly if the size of their position is large relative to normal daily trading volume. Successful distribution of a large position can only take place during waves of strong buying enthusiasm, so that shares may be offered in size without driving down the price.
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"That is one trouble about trading on a large scale. You cannot sneak out as you can when you pike along. You cannot always sell out when you wish or when you think it wise. You have to get out when you can, when you have a market that will absorb your entire line. Failure to grasp the opportunity to get out may cost you millions. You cannot hesitate. If you do you are lost."
Edwin Lefevre, Reminiscences of a Stock Operator |
Stock is distributed by strong hands as prices rise For that reason, distribution appears on the tape very similar to earlier stages of mark-up. Indeed, distribution may be considered the terminal stage of mark-up.
During distribution, interest in equities is high. Strong hands release shares into the market to meet this new demand. Shares which have been off the market for months or years are put back into circulation. Trading activity increases. Buyers include late adopters of equity (the "public") and active traders (weak hands).
At an earlier time, pool operators stimulated buying interest by spreading rumors and by commissioning favorable reports. Knowing that the public is attracted to active issues, operators artificially hyped trading activity by buying and selling in large blocks.
Today it is illegal to manufacture rumor or to manipulate trading activity in order to market shares at favorable prices. But such manipulation is hardly necessary. Constant media coverage of both rumor and news, a torrent of brokerage recommendations, and hundreds of financial newsletters touting thousands of stocks provide intense marketing of equities.
The typical trader seeks to be in on the action. The person who is willing to wait in line for hours to save a few dollars on sale-priced merchandise will commit thousands of dollars in a moment to stock selling at record prices.
Studies show that individuals are more comfortable, and therefore more likely to take risks, if they are part of a group taking the same risk. If the venture turns out well, they cannot bear to miss out, and if badly, they are sheltered psychologically. Misery, after all, loves company.
Rising prices create tension for the undisciplined trader. He or she fears that some group, of which he or she is not a member, is doing well. Purchase brings relief. The trader's entry is validated by the participation of a large group of already successful traders in the issue. Active volume signals permission from the group to trade.
Undisciplined traders act to protect their own psychological well-being rather than their capital. Precisely for that reason, the skills required to sell well are harder to learn and take longer to acquire than the skills required to buy well. Of the two, selling is the more important. Selling well is the key to larger profits and smaller losses.
Next, we take up the action of an industrial index as it rises out of a period of reaccumulation. Prior to the action shown on the chart, the index rose within a well-established uptrend.
The index has shown evidence of accumulation since April. At A the price shakes out below minor support. The shakeout triggered sell stops and encouraged short selling. The trap closes quickly on sellers during the next session as price recovers to close high in the range and above support. The shakeout has created potential future demand, for once sellers realize they've been trapped, they will scramble to buy back at higher prices.
We take a long position at the opening of the next day. An immediate rally carries the index over near-term supply around 130. A reaction over the next seven sessions shows little selling enthusiasm. Spread narrows. The sharp but regular decline in volume as the price settles back to minor support (B) indicates that sellers are unwilling to pursue the price down. There is a clear bias of power to the upside. We add to our long position.
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The point & figure chart below uses one-point reversals. Two objectives are taken. The count at 126 spans 18 x's, from the vertical descent on the left to the vertical ascent on the right, to yield a target of 143. A second, more ambitious count at 131 yields a target of 158.
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Point & figure counts can be taken either from the row across which the count is made or from some other support level. In this case, the count of 28 across 131 may be added to support at 124 to yield a more conservative target of 152.
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Point & figure analysis provides three possible objectives: 143, 152 and 158. We will remain watchful for signs of possible distribution should the price approach these levels.