Top Advisors Corner

Martha Stokes: Dark Pools Accumulation

Martha Stokes

Martha Stokes


High Frequency Traders HFTs are usually easily seen on stock charts with huge gaps, long one day candles, and spiking volume patterns. However their counterpart which is the long term mutual and pension fund institutions, are often harder to see and identify.

The stock chart for CA Inc. (NASDAQ:CA) is a good example of why many technical traders are confused as to what to search for when trying to find Dark Pool activity.  This is especially because of the sudden velocity runs these giant funds tend to create, when professional traders and HFTs discover the giants have been buying up millions of shares of a stock.


The typical assumption by many technical traders is that because Dark Pools buy in larger lots from 100,000 to 500,000 that their buying will cause price to move up, however the opposite is true. Dark Pools are far away from the exchanges were most HFTs and pros trade. Hidden on their private venues, they have specialized orders that also are automated and trigger on specific price and time algorithms. 

These are designed with such sophistication the Dark Pools rarely alter a trend and are in complete control creating platforms, which are narrower than a trading range but wider than a consolidation pattern.

The stock chart for CA is an excellent example of a platform, where a few giant buy side and sell side institutions quietly started accumulating the stock during the summer. Since their orders are controlled bracketed orders that define a specific price range, this sideways price action has very concise highs and lows. Many technical traders using trading systems that employ the red light/green light strategy are often whipsawed in and out of trades during a platform phase, causing chronic losses and frustration.

If the technical trader has not learned how to identify platforms, they will often be attempting to trade a platform as a momentum run only to be cut off just as profits begin to occur.

This accumulation phase was very solid, as shown by the lows of accumulation. Volume during accumulation often is below average, and only HFTs spike the volume and create weaker runs. As the stock moves down, which can occur even while accumulation is underway as the Dark Pools goal is not to disturb the trend, the Accum/Dist indicator shows that the buying slows. The buying continues though as the stock drops to a lower fundamental support level, where Dark Pool buying had previously been heavier. The V bottom on Accum/Dist is a clear signal early on, of a momentum run potential. As Pro traders and HFTs discover the accumulation, the stock runs back up without more Dark Pool buyers. Volume even on the gap down to run up white candle bottom days, is higher than previously indicating professional traders have moved in ahead of HFTs anticipating their later triggers. 

Currently as of the date of this chart, the Accum/Dist is warning that the run is unsustainable and profit taking is likely soon. 

Summary: 
Learning to recognize Dark Pool buying or selling patterns is important for all technical traders, as often times price will be contrarian or will be in a platform phase. Both can cause problems for technical traders if they are unaware of the presence of Dark Pools accumulating against the sellers.

Trade Wisely,
Martha Stokes CMT
www.TechniTrader.com
info@technitrader.com