Today marks the start of the rest of the year. By this I mean I have always considered the market to change in character right after Labor Day. The volume drops over the summer as traders and money managers take time off. Stock movement often seems more a case of a lack of buyers or sellers than accumulation or distribution by institutions. That changes after Labor Day.
So normally, I get ready to step up my trading. I prepare by scanning through hundreds of charts, checking the fundamentals and seasonal track records of the best looking ones, and watching my resulting list closely for high probability setups to form.
I've been doing that this year. But because of the uncertainty of the current situation with Syria, I of course will stay out of the market until things appear stabilized. But I will be ready.
I will share some of what I've discovered looking over numerous charts.
The first thing I noticed was that a large number of the stocks I looked at had formed one to two month trading ranges, and volume was low. In most of these cases, it isn't worth investigating trade possibilities. It would be best to wait for a breakout and then trade the breakout.
I next noticed a few major stocks that were an exception. While they hadn't moved much recently, the volume pattern was noticeably tilted towards accumulation, with only minor selling on down-close days. The thing that interested me was that most of them were in the Consumer/Non-Durables sector. These companies sell products that are needed no matter what. They need to be regularly replaced, they are consumables.
So while, as an active trader, I don't normally pay attention to stocks like Colgate (CL) or Proctor & Gamble (PG), seeing evidence of institutional accumulation in their charts suggests trades on stocks like these could be a low-risk way to trade within higher risk environments.
What is it about their charts that captures my interest? Volume patterns. My charting tool colors volume bars green on up-close days and red on down-close days. I can spot institutional accumulation across the room.
Example 1: Colgate has traded within a tight trading range, from 56 to 62, for 5 months now. But since late June, the volume on up-close days (green bars) has been higher than volume on down-close days (red bars), although that has fallen off a bit in the past two weeks. Even though there were a few extended down-moves, the selling was brief and buying quickly came back in, and kept reappearing every few days.
Proctor & Gamble displayed a similar pattern.
Continuing on through my watchlists, I looked for other stocks showing mostly accumulation. To confirm my visual estimation of accumulation, I used an indicator commonly used by Investor's Business Daily – the Up/Down Volume Ratio indicator. The Up/Down Volume Ratio is the ratio of total volume on up-closing days, divided by the total volume on down-closing days, over 50 trading sessions. A value > 1.0 usually indicates more buying than selling interest, and a value < 1.0 indicates greater selling. The U/D ratio on all stocks is available on IBD's Stock Checkup and often displayed in their various scan results.
I calculate and chart this value. I look not only for the current value of this indicator, I look for trends in this indicator. An Up/Down Volume Ratio of 1.3 or above, or a ratio that has been trending upwards, is often found on strong stocks, stocks being accumulated by institutions.
Example 2: Celgene has been a strong stock this year. While it briefly retreated below its 50-day moving average in June, it was only temporary. Better yet, the volume pattern (not shown) has been suggesting periodic institutional accumulation.
To confirm, I charted the U/D Volume Ratio over the past year. The current value is 1.7, but the U/D Ratio has been steadily climbing since late June, confirming likely accumulation.
Example 3: Rogers, a maker of advanced materials used by a range of manufacturers, has been strong since late April. Notice the almost total lack of volume on down-close days:
The Up/Down Volume Ratio confirms strong institutional accumulation quite visibly. It has been high for most of the past year (currently at 2.7).
Example 4: Sketchers, a ‘billion-dollar leader in the lifestyle footwear industry', has been on a sprint since late April 2012. Institutional accumulation has been apparent for most of that period.
The Up/Down Volume Ratio, currently at 2.2 and trending upwards, confirms the recent strength:
Example 5: Wolverine has been strong since the beginning of the year. In the February 20th newsletter, when it was at 45, I focused on buying and holding the stock for the long-term. WWW has gained 36% since then. While it is difficult to see in the small chart below, a wide-screen chart shows regular sharp spikes of volume on up-close days.
Wolverine's U/D ratio is currently at 1.7, but the trend indicates accumulation has been increasing over the past year.
Wait for things to settle down
So the above stocks are good quality stocks showing accumulation. If international events settle down to the point where you are comfortable entering new positions, these offer interesting trade possibilities.
But my final filter is seasonal track records. This is what has made the biggest difference in my trading. At this point, when I have formed a trade candidate list from technical analysis and checked the fundamentals, the thing I look for is a track record of institutions accumulating the stocks this time of year. They tend to know the annual cycles of the companies they invest in, and many tend to return to the same trades year after year. I like to ride the coattails of institutions.
In today's Seasonal Forecaster newsletter, I detail the one true standout of the above group, the ‘ok' trade candidates, and the one with an average 14.7% loss over the next 15 weeks (it had losses in 12 out of 14 years!)
Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, type in www.markettamer.com/seasonal-forecaster
Copyright (C) 2013 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.
Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.
As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.
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