I’ve been reading Robert Edwards, John Magee’s “Technical Analysis of Stock Trends, 9th Edition”. In Chapter Six of the book, I’d like to highlight something they have written which sounds very much like what is happening today. This is the wonderful thing about technical analysis, most of the price action may not be exactly the same, but can be found to have many patterns of similarities within them.
If I were Macquarie Securities, holding 1 Bil worth of LC shares, how do I distribute them all? Let Edwards & Magee’s wisdom guide every trader.
Suppose they have 20,000 shares to unload. They cannot throw all on the market at once; to do so would defeat their own ends immediately and, perhaps, permanently. They must feed their line out little by little, trying to avoid attention, feeling their way along and never permitting a surplus of offerings to kill the demand. If activity in their stock has reached a level of, say, 2000 shares transferred daily, they may be able to dispose of 500 shares a day from their holdings without bringing the price down. (They will be competing, sooner or later, with others who have followed their play, who bought lower down and will be ready to take profits as soon as the advance shows signs of weakening.) So they start to sell when the rising trend appears to have attained maximum momentum, or as it nears their price objective, but well before it has reached its probable limit, and they push out their shares as rapidly as buyers will take them.
Before long, as a rule — before they have distributed their entire line — a lull in demand will occur. Perhaps prospective buyers sense the increase in supply. A reaction develops. Our group quickly ceases selling, withdraws its offers, perhaps even buys back a few shares to support prices if they threaten to drop too far. With supply temporarily held off the market, the decline halts and the advance resumes. Our group lets it proceed this time until it carries prices into new high ground; this reassures other holders and brings in more buyers. As soon as the pot is once again merrily boiling, distribution is started anew and, if the maneuver has been well directed, completed in perhaps 2 or 3 weeks, before the second wave of demand has been exhausted. Our group is now out of its stock with a nice profit; its 20,000 shares have passed into other hands. If they gauged the market correctly and distributed their line at a price about as high as the situation would bear, demand will have been satiated for a long time to come.
You can see now why, under one specific set of circumstances, a Top area, a chart pattern of distribution, takes time and volume to complete.
But, it doesn’t matter whether we have to deal with the highly organized operations of a single group of insiders or of an investment syndicate or, as is more often the case, with the quite unorganized activities of all the investors variously interested in an issue. The result is pretty much the same. Distribution, which is simply the Street’s way of expressing the process of supply overcoming demand, takes time and a change in ownership (turnover) of a large number of shares. And it is amazing to see how these patterns of distribution, which hereafter we shall find it simpler to refer to as “Tops,” tend to assume certain well-defined forms. Most of the same pattern forms appear also as “Bottoms,” in which manifestation they signify accumulation, of course, instead of distribution.
– The Faceless Trader