Custom Search

stocks or commodities

Let me describe one situation which would lead to this type of behavior. Forget for the moment that we are discussing stocks or   commodities and imagine that you are a dealer in collectibles (coins, fine art, etc.) You decide that, say, snuff boxes which are   now in very little demand could be promoted into a fashionable collectible. So what do you do? First, very quietly so as not to tip   your hand, you start buying up all the snuff boxes that come on the market.

 This is zone I, where if you recall the psychology of the "accumulator" described in article #7, the price finds support at an S/R   level. When you have finally accumulated your desired level of inventory, you start promoting snuff boxes as a collectible thereby   creating demand in the general public. You sell your inventory at retail and - deciding that the demand for snuff boxes will   continue to be strong for some time - you replenish your inventory by buying at wholesale as the ever-present traders who have   jumped on the snuff-box bandwagon take their profits.

This all takes place in zone II, which we may call the "trading zone", where the fixed inventory is turned over by changing hands   within a group of trend following traders (of which you are the leader by virtue of your preeminent position). Finally, you observe   that the number of snuff boxes coming up for sale is diminishing because they are moving into weak hands who are putting them   away in vaults for the long term. This decreased liquidity in the market means that you will not be able to make as much as a   trader since the turnover will be diminishing.

You therefore decide to liquidate your remaining inventory and go on to something   else. In this "distribution phase" (zone III), you support the market as required by buying on pullbacks in order that the price shall   continue upward to attract the remaining johnny-come-latelys to buy the last of your inventory at the top of the market. Thereafter,   you no longer have any interest in supporting the price and it drops of its own weight as few buyers are now found to maintain an orderly market.

This "accumulation-trading-distribution" sequence involving a fixed number of shares or contracts can arise in a number of   different ways. One is a direct analog of the above scenario where - through skillful hype - stocks are cynically promoted to   unrealistic valuations and foisted upon an unsuspecting public. On a more refined - though no less cynical - level, corporate   insiders wishing to sell a large block of their stock engage an investment banker to optimally distribute this block, who then   through "road shows" and the like beats the drum for the institutional buyers always looking for a new "concept" .

Other scenarios can no doubt be conceived (eg. short squeezes), wherein a specific number of shares are involved in a dynamic   process significantly different from the normal ebb and flow of supply and demand, and where the normal dynamics are restored   when such shares have been absorbed. Why the specific parabolic formula for the effective displacement should work so   well   remains an interesting question in search of a viable model. (Analogs to the "two-fluid" models of low temperature physics come immediately to mind).

The actual computation of P-Hat from the above equation requires some discussion which will be given in the article to follow.   There, we will also give examples of stocks which are presently following topfinder curves, so that testable predictions of future tops can be made.