I've always been confused with the notion of too many sellers or too many buyers when it takes one of each to make a transaction. When we see volume statistics, I always assume this is a measure of "trades", a buy AND a sell.
Can someone help with definitions of Oversold/Overbought, and distribution/accumulation, and let us know how we can accurately assess these with the tools available online today?
Hi Daniel; good questions. Your thinking is correct, for each sale there is a buyer and a seller. Alexander Elder gives the definitive answer in his book "Trading for a Living". There are equal numbers of buyers and sellers. Prices rise when buyers are more aggressive than sellers; prices can also rise when sellers are afraid and demand a premium.
Elder states that "Every change in price reflects what happens in the battle between the bulls and the bears. Markets rise when bulls feel more strongly than bears. They rally when buyers are confident and sellers demand a premium for participating in the game that is going against them. There is a buyer and seller for every transaction. The number of stocks and futures bought and sold is equal by definition".
Now, from my own point of view, the number of buyers and sellers for a stock like Ascend can't be exactly equal at all times. That's where the market makers come in. They carry an inventory and absorb small inequities between the numbers of buyers and sellers. Thus, they provide liquidity all the time. But should everyone decide to sell Ascend all at once, the MM's would not absorb such an inequity. We would then lose liquidity. A friend of mine has a penny stock he has been holding for two years. Nobody wants to buy it, so he's stuck with it.
Overbought/oversold is a tougher question and the technical tools for this are called oscillators. Stochastics would be your best bet for finding oversold/overbought conditions. But beware, as Elder states, "knowing when to use oscillators is the hallmark of a mature analyst". Right now, stochastics analysis says that Ascend is oversold. But stochastics is not reliable in a trending situation. The stochastic oversold signal can stay oversold for months; just dribbling along the bottom of the scale. A stock in a strong rally can remain "overbought" for weeks, just bouncing off the top of the scale.
You can find stochastics and other technical indicators, on www.stocksmart.com. This is one great site, providing many technical indicators. One point of caution, Microsoft Explorer and AOL's browser can not fully exploit the potential of StockSmart. They only show 2 of the 8 existing technical tools. Netscape Navigator is required to make the most out of StockSmart.
Accumulation and distribution tells us who's winning between the bulls and the bears. If a stock is under distribution, that could mean the institutional traders (mutuial funds, pension funds, major money managers) are dumping it. If under accumulation, then the big boyz are buying. Larry Williams developed the technical indicator for this somewhere around 1972. It is generally known as William's AD. Most software contains this indicator. Investors Business Daily (my favorite publication) is an excellent way to discern accumulation/distribution. With each daily price publication, they rate each stock from an "A" to an "E". "A" means extreme accumulation, while "E" means extreme distribution. Ascend currently carries an "E" from Investors Business Daily - sorry.
I think that Alexander Elder's book "Trading for a Living" is one of the best books out and worth every penny you might pay for it (about $55). In addition to providing excellent trading strategies, you walk away from that book knowing a lot more about how the market works. I strongly recommend this book, which you can buy directly form www.elder.com. You probably won't be able to put this book down.
Hope I've answered your questions. Good luck with your trades.
Harry |
