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How to Read Stock Charts: Part 2

Don't you just love stocks? They allow you to accumulate dollars, while your girlfriend gets to distribute them.

Lucifer Morningstar

Welcome to part dos of understanding stock charts and movement (in case you missed part 1 you can find it HERE). It’s been a glorious few weeks as a SPAQ owner, having little spurts of movement with pop and fades. Why is this good you may ask? Well for one, you might be a scalper and flip for pennies, in which case, I hate you. On the other hand, it gives me an opportunity to ACCUMULATE shares at a cheaper price, allowing me to average down if I wish.

Accumulation Days

To accumulate is to acquire more of, but you knew that already. You accumulate loads of things in life: Bud Lights on Thursdays, the courage to talk to the brunette at the bar, friends, etc. In the stock market, accumulation is used to describe the accumulation of shares by traders. The more people that buy, the more shares that are purchased, which means more shares are accumulated.

Given that accumulation means to obtain more of, it is exactly as it sounds: an accumulation day is when the stock closes (finishes the day) higher on volume (or the number of shares traded) greater than the day prior. So if a stock closed yesterday at 35 cents per share with a total of 100,000 shares traded, and today closes as 40 cents per share with 300,000 shares traded, then we can say it was an accumulation day overall. Think of it like this: you’re at a beat the clock event down the shore, chugging beers. You are ACCUMULATING cheap booze and more of your hard-earned cash is being traded to the bartender. The volume increases because it’s so cheap. If the price is going up over time, you're going to want to get in early. There have been too many times where the clock has beaten me and I end up paying a dollar per beer where I could've only paid 50 cents.

Accumulation days are very positive events because they signal underlying strength due to the fact that institutions are accumulating shares and pushing the stock price higher. The more buying investors do, the more accumulating that is going on, which makes it more likely that the price of a stock will rise.

One last important concept to understand when identifying accumulation days on a stock chart is to look for days where volume was above the 60-day average, but you can use whatever time frame you want. Low volume days have little meaning because it means few institutions were involved. I don’t care too much for them. Here’s an example with FCX. The higher volume created a higher price, as volume precedes price. The volume cools off as the desired shares are purchased, resulting in a price per share increase. Following the chart, there was massive buying in the middle of July, followed by a cooldown until September, when prices reached higher highs.

Distribution Days

Distribution days are the opposite of accumulation days and thus are considered bearish. They are like when your girlfriend (or boyfriend, hey, men are assholes too) dumps you in the middle school hallway in front of everybody. This is because there's more selling taking place than buying, which decreases the stock price. In this case, she has sold you for the more handsome, fairer-skinned stock, dumping you to your knees, crying. I’ll never forget that break up.

For a day to be considered a distribution day, the stock not only has to end down (net change), but there also has to be more volume (total shares traded) than the day before. Just like accumulation days, the volume not only needs to be greater than the day prior, but also greater than the average you want to use.

In short, when you think of distribution days, think of the word “distribute”, "selling", or "red". Red is bad! Unless you’re a short seller, in which case we're not friends. With a distribution day, there are more net sellers than buyers. Check out TD’s chart below.

The distribution to markdown phase is where many stock traders turn into long term investors, and not by choice.

Luckily, there's no bag-holding in my Dojo.

**Not a financial advisor. Articles are my opinions only.

Find part 3 HERE