Accumulation Or Distribution?
Shares in Amgen rallied
sharply Monday on favorable news, but this is one of those situations where the
intraday action clouds the accumulation vs. distribution picture. Moreover, the
biotech sector has been caught below a bearish topping formation. So the jury is
still out here, rather than taking gap-up move at face value.
Stock in the No. 1 biotechnology
company closed up 7 5/8 to 67 5/8 on heavy volume after a judge upheld a key
company patent and ruled that a rival drugmaker had infringed on Amgen’s
patent for Epogen, a blockbuster anemia drug. Morgan Stanley Dean Witter
lifted its rating on the stock to “strong buy” from “outperform.”
This is a mixed picture.
On one hand, you have a strong gap-up move, which among other things cleared the
50-day moving average. However, profit-takers moved in, causing the stock to
close in the lower portion of its range. A close near the top of the range would
have been more bullish.
Generally speaking, an
accumulation day is a session in which a stock closes up on an increase in
volume over the prior session. This is a bullish sign, indicating institutions
are building positions in the stock. A distribution day is one in which a stock
closes down on an increase in volume, indicating institutions are unloading the
stock. The greater the volume, the more authoritative or predictive the session,
broadly speaking.
However, you may have a
battle of supply and demand if sellers come in and roll back a good portion of the
gains of the accumulation day. In such situations, don’t try to force an
interpretation. Give the stock more time to prove itself.
For more on how I analyze
price in light of volume, see my lesson Volume:
The Key To Price And Liquidity.
Note also that Amgen was
stopped just above its mid level, the half way point between the pre-correction
high and trough of a correction-recovery pattern. Among other tests, I insist
that long trades clear their mid points before looking for entries. The reason
boils down to overhead supply. The deeper you buy in a forming base, the more
likely you’ll run into selling as the weak hands use rallies to exit.
The stock’s relative
strength line also has some work to do before it would appeal to an intermediate-term momentum trader.
The top field of all
charts in this commentary uses a logarithmic price scale and displays a 50-day
price average in red.
In the second field, a blue relative strength line represents the displayed
security’s price performance relative to the S&P 500. The third field
displays vertical daily volume bars in black with a 50-day moving average in
blue for volume.
Remember that all stocks are
speculative and risky. On any trade, reduce your risk by limiting your position size to a percentage of your total
account and setting inviolable price stops. For an intro to combining stops with
position sizing, check out my lesson, Risky Business.