Top Advisors Corner

Martha Stokes: $TRV Recognizing Dark Pool Rotation

Martha Stokes

Martha Stokes


Small Lot Investors Are Often Unwittingly on the Wrong Side of the Trade

Technical Traders need to learn to distinguish between Dark Pool rotation, the automated intraday millisecond trading of High Frequency Traders, small funds’ trading activity, and retail or small-lot trading and investing activity.

Each of these groups leaves a distinctly different pattern on candlestick patterns, volume, and other quantity indicators. Often times, technical traders who just study trends do not realize which of the above market participant groups is actually moving price.


One of the hardest lessons to learn in our modern electronic marketplace is that automated orders that start out in the Dark Pools are highly sophisticated and hidden from intraday HFTs and most traders. The Dark Pool’s intent is not to disturb the trend that is occurring at that time.

Dark Pools have a unique and often proprietary set of orders that they use that control the impact of their buying on a stock price. Therefore, a run up many points is rarely Dark Pools, aka the giant funds, buying. The same is true of downtrends. The Dark Pool orders are so precisely timed to the flow of activity that these huge-lot orders do not interrupt the trend until the sellers are completely exhausted. Once that occurs, the bottom formations of the Dark Pools develop for example bases and platforms. Tight sideways patterns at a low are the mark of the Dark Pools controlling the stock price in precise, predetermined, narrow ranges.

The chart below of The Travelers Companies Inc. (NYSE:TRV) doesn’t have a base bottom or U shape bottom, as is typical of Dark Pool buying. Instead, the run is a momentum action, angling up steeply on lower up-day volume and numerous resting day patterns. 

MFI overextends quickly, exposing the smaller-lot activity. Accum/Dist develops a weak, insipid pattern that crosses down easily. Downside volume is higher than upside volume.

RSI, with a center line oscillation RSI line, also shows clearly that the price trend is weaker in TRV than it may appear to technical traders. The fact that this run was unable to overcome the prior high and weakened at the gap-down level is another indication of smaller-lot traders.

Dark Pools move millions of shares of stock, slowly over many weeks to months’ time. When they are rotating to lower their held shares in Charters with the intent of investing in an alternative Charter stock, the slow steady selling goes unnoticed by smaller-lot investors and retail traders.

Therefore, smaller lots and smaller funds using VWAP are often buying, moving price up, while the Dark Pools are selling quietly with extreme care. The smaller-lot buying moves price up even though the larger lots are on the sell side. This continues until finally the larger lots overwhelm the smaller lots. When this happens, HFT algorithms often trigger which can create steep runs or gaps down. 

Understanding WHO is controlling price requires more sophisticated Spatial Pattern Recognition Skills but has a huge benefit. The ability to know who is moving price tells the technical trader what to expect with the run, where it will stall, what resistance will affect the run, and when to exit for higher profits.

Technical Traders can trade with any group of market participants if they understand how that group impacts price, volume and other quantity indicators.
 

Trade Wisely,

Martha Stokes CMT
www.TechniTrader.com
info@technitrader.com