The New Science of Technical Analysis

Chapter 5

Accumulation/Distribution

My introduction to conventional technical analysis and to its preoccupation with subjective and artistic interpretations left me totally frustrated. Consequently, I rebelled and reverted to the other extreme: I searched for techniques that were totally objective and mechanical. At the same time I was poring over charts and divining mechanical chart techniques, I employed my economics and mathematics background to create supply–demand models capable of identifying buy and sell opportunities. My journey to accomplish this goal is described in this chapter.

Although I initially experimented and developed these various techniques for the equity markets, my research confirmed that, with a few minor adjustments, these same methods could be applied to the futures markets. Through the use of various price volume studies and formulas, I ultimately created the product that satisfied my needs.

I had learned in Economics 101 that an increase in demand occurring at the same time as static or diminishing supply translated into an advance in price. Conversely, an increase in supply that was coincident with constant or reduced demand caused price to decline.

With those principles in mind, I researched all the techniques I could find that dealt with price movement and volume. This mission included the basic on-balance volume approaches used by various market analysts. Specifically, in these instances, price activity was compared to numerous volume-weighted calculations. ...