What Is the Accumulation Area?
The accumulation area on a price and volume chart is characterized by mostly sideways stock price motion and is seen by many investors or technical analysts as indicating a potential buying opportunity. It may signal that large institutional investors are buying, or accumulating, a large number of shares over time.
This can be contrasted with the distribution zone, where institutional investors begin selling their shares. 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 represents a period of implicit buying of shares, typically by institutional buyers, while the price remains fairly stable.
- On a price chart, the accumulation area is characterized by sideways price movement on above average volume.
- Identifying this area could help investors spot good entry points into an investment before its price begins to rise.
Understanding the 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.
The Accumulation/Distribution Indicator (A/D)
Accumulation/distribution (A/D) is a cumulative indicator that uses volume and price to assess whether a stock is being accumulated or distributed. The accumulation/distribution measure seeks to identify divergences between the stock price and volume flow. This provides insight into how strong a trend is. If the price is rising but the indicator is falling this indicates that buying or accumulation volume may not be enough to support the price rise and a price decline could be forthcoming.
The A/D indicator is cumulative, meaning one period's value is added or subtracted from the last. A rising A/D line helps confirm a rising price trend, while a falling A/D line helps confirm a price downtrend. If the price is rising but A/D is falling, it signals underlying weakness and a potential decline in price, and vice-versa.
Using 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. Leading up to the former, the market had already lost 10% over the five weeks before Oct. 28, 1929, when it fell 13% in a single day. In that one day more than $14 billion was wiped off the books.
More recently, the Dow Jones Industrial average peaked at 14,164.43 on Oct. 9, 2007, only to lose half its value in just 18 months, closing at 6,594.44 on March 5, 2009.