Posted by forex at 3:17 AM
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1. Follow the volume of a stock that seems to be trying to make a trading bottom. The stock will be characterized by generally increasing volume and resistance to dropping below recent lows. In addition, the stock should be near the 200-day moving average for a major low or the 50-day moving average for a trading low. Subscribe to the 'Investment Business Daily,' especially the Monday edition, for charts of its highly ranked stocks.
2. 'Make a base' means watching a stock form a trading pattern where its range or difference between the high and low price price is wide but narrowing daily. The stock tests its lows but does not make any lower lows. The closing stock price is at or slightly above the middle range but off from the high.
3. If volume is increasing as the stock price rises each day (or 'intraday,' if you have access to Level 2 quotes), you may be certain that institutional monies are buying stock on any weakness and letting the stock quote close at about the same level as the day before to disguise their interest. This is called 'accumulation.' (Level 2 quotes are used by professional traders to indicate the volume and prices at which all interested parties in a stock are willing to pay.)
4. Completing the trade may take an institution weeks or months. During that time, the institution will have accumulated millions of shares of stock while the stock slowly rises from the base pattern, because shares at the base price are getting more difficult to find.
If you have been watching with Level 2 quote machines, you may see large volumes of stock for sale at higher prices. These quotes are actually from the buyer of the stock who wants to create the appearance of selling pressure to keep stock price down.
5. When the institution has completed its program, it will usually buy stock so that there is a volume explosion causing anyone short the stock to cover. The result is that all the purchased stock during accumulation will sharply increase in price, raising the value of the entire acquired stake tremendously. Volume spikes of 300 percent increases after rising from a basing pattern is a certain sign that institutional money has moved to a completed stock position.