What is the Accumulation Area
The accumulation area is characterized by mostly sideways stock price motion and is seen by many investors as indicating a potential buying opportunity.
Breaking Down Accumulation Area
The accumulation area is important for investors to recognize when making buy and sell decisions. Experienced investors look for patterns indicating a stock is either at a high point, low point or somewhere in between. The goal is to determine if there is momentum in a stock price and in which direction. A stock in the accumulation area may be about to break out. When a stock price doesn't fall below a certain price level, and moves in a sideways range for an extended period, this can be an indication to investors that the stock is being accumulated by investors and as a result will be moving up soon.
The accumulation area is just one form of charting. Charting is also used to identify what is known as the distribution zone, which may indicate that a stock is nearing a selloff. Investors look for divergences between stock price fluctuations and trading volumes as key to their charting analysis.
The widespread availability of online charting tools through the many investment companies is allowing more and more investors access to charting techniques once confined to professional brokers. This access to new tools allows the investor to look back over many years to see those times when stocks moved up. The investor wants to understand what was happening consistently in the past immediately before a stock price moved up. The trader is looking to identify ranges of price and volume movement. A prolonged sideways chart range with no large ups or downs indicates the stock is in the accumulation area and may be about to move up in price.
Being able to recognize whether a stock is in the accumulation zone or the distribution zone is critical to investing success. The goal is to buy in the accumulation area and sell in the distribution area.
The Accumulation Area Pros and Cons
Understanding chart movements such as those seen in the accumulation area can work very well during times of relative stability, but prudent investors know to pay attention to larger economic events that can quickly reconfigure charts.
Two of the best known seismic economic events were the Great Depression and the Great Recession. During the Great Depression the market had already lost 10% over the previous five weeks leading up to October 29, 1929, when it fell 11.5% in a single day. In that one day more than $40 billion was wiped off the books.
More recently, the Dow Jones Industrial average peaked at 14,164.43 on October 9, 2007, only to lose half its value in just 18 months, closing at 6,594.44 on March 5, 2009.