TimingCube - Accumulations and distributions as trend indicators - accumulations,distributions,trend indicators,technical analysis,money flow

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Signal Update

Current Signal Performance as of

Signal Type	Trade Date	Index	Return since issued
		Nasdaq 100
		Russell 2000
		S&P 500
		QQQ

Cumulative Returns since First TimingCube Live Signal () as of

Index	Long Only	Long Only with Margin	Long & Short	Long & Short with Margin	Buy & Hold
Nasdaq 100
Russell 2000
S&P 500
QQQ

Note: QQQ returns are included for continuity sake.

Market Update

Markets started the week better than they finished it. Encouraged by positive comments from Fed Chairman Alan Greenspan, investors pushed the Dow and S&P 500 to new multi-year highs on Wednesday. Bullish sentiment then started to fade and market indices finished the week on a down note, albeit on reduced volume from Wednesday's session. The Nasdaq 100 lost 0.97% for the week, while both the Russell 2000 and the S&P 500 finished slightly higher, with respective gains of 0.18% and 0.27%. It should be noted that since mid-January, the Russell 2000 and the S&P 500 have outperformed the Nasdaq 100, as money has rotated out of technology stocks following the big run up of the previous month.

The week's action had no impact on our Model, and our Buy signal remains active.

Trend Timing School

Accumulations and distributions as trend indicators

In past Trend Timing School editorials we have introduced several Technical Analysis (TA) indicators and methods that are valuable in determining the broad market trend, and more importantly changes in the trend. Most of these techniques, such as moving averages, focused primarily on price and how it evolves over time. Today we look at volume as an indicator of acceleration, momentum and money flow, which assists greatly in pointing out trend changes.

Volume reflects the number of shares traded in a particular stock or index, and is a direct manifestation of the money flowing into and out of the stock or index. The theory behind all volume indicators, including accumulations and distributions, is that quite frequently volume precedes major price moves. Volume is also very accurate in showing the buying and selling activity of the big institutions that move the market. There are numerous ways to look at volume, including fancy mathematical formulas and charting techniques, such as the well known and popular Chaikin Accumulation/Distribution Line. As with everything in Trend Timing, we like to keep it simple.

But first, we should define the concept of accumulation and distribution in our own plain terminology. An accumulation occurs when the price of a stock or index closes substantially higher AND with noticeably increased volume than the previous day. Conversely, a distribution takes place when the price of a stock or index closes substantially lower AND with noticeably increased volume than the previous day. We say "substantially" and "noticeably" to make sure we discard small variations as meaningless noise. Individual accumulations and distributions are not significant by themselves, but rather when they occur in succession over short periods of time. Alternating accumulations and distributions tend to cancel each other out. As an example, if we have several accumulations over a short period of time, without any interspersed distributions, it is a strong hint that something unusual is afoot. If our current signal at the time is a Buy, we would interpret this as a very positive confirmation of the then prevailing uptrend. If instead we are in Sell condition, a pattern of repeated accumulations would be interpreted as a warning sign which, when used in combination with the other indicators we favor, could point to a change in the broad market trend, and lead to a Buy signal being issued.

Accumulations and distributions, like all Trend Timing essentials, rely heavily on common sense. If the market tells us that for a number of days, more and more investors and institutions are placing increasingly larger size orders at consistently higher or lower prices, one gets a clear reading of the momentum's direction. As with all indicators, volume by itself is insufficient to accurately and consistently determine the trend, but in combination the indicators in our Model have shown an exceptional 80% plus hit ratio.

FAQ of the Week

Question: Are the amazing returns for the German DAX index really accurate?

We need to thank the many astute and skeptical subscribers that raised doubts about the DAX index figures you can obtain in the on the "Results" page. After verifying the source data we used and cross-checking it with other sources, we discovered a problem, and therefore the published results were indeed incorrect. For some reason the DAX historical prices on Yahoo! Finance appear to randomly alternate between two data sets, one accurate and one erroneous. As Murphy's Law dictates, we grabbed the erroneous set! We have now updated and posted the corrected results.

So the bad news is that the previously published returns were too high, the good news however, is that the German DAX index still is the uncontested performance king over the last couple of years. Somehow, in the recent past, the German stock market's good performance, high volatility, and excellent correlation with the Nasdaq Composite and our Trend Timing Model, has put it at the top of all the indices we track, both domestic and international. We cannot predict how long this will continue to be the case, but it certainly underscores the wisdom of diversifying amongst several indices.

Warm wishes and until next week.

The TimingCube Staff