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Strategies & Market Trends : Strictly Buy and Sell Set Ups

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From: chowder11/19/2004 8:23:11 PM
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..... BALANCE OF POWER (BOP) ......................................

Stockcharts describes Accumulation Distribution as a momentum indicator that relates price changes with volume. The concept is that the more volume that accompanies the price movement, the more significant it is. It relates the closing price to the range of prices (H - L). The closer the close is to the high, the more volume is added to the cumulative total. If the close was exactly in the middle, between the high and the low, the indicator would be unchanged for the day.

There are many indicators available to measure volume and the flow of money for a particular stock, index or security. One of the most popular volume indicators over the years has been the Accumulation/Distribution Line. The basic premise behind volume indicators, including the Accumulation/Distribution Line, is that volume precedes price. Volume reflects the amount of shares traded in a particular stock and is a direct reflection of the money flowing into and out of a stock. Many times before a stock advances, there will be period of increased volume just prior to the move. Most volume or money flow indicators are designed to identify early increases in positive or negative volume flow to gain an edge before the price moves. (Note: the terms "money flow" and "volume flow" are essentially interchangeable.)

My software uses a different version of measuring accumulation and distribution. It is called "Balance of Power," BOP for short. It was developed by Don Worden of Worden Brothers and incorporated into their TC2000 and TCNet software.

BOP tells you whether the "UNDERLYING" action in the trading stock is "characterized" by systematic buying (accumulation) or systematic selling (distribution).

BOP "IS NOT" a trigger indicator. It measures the strength or weakness of a price movement. The price can rise while distribution is going on. The price can also fall while accumulation is going on.

BOP can be classified as a "quality indicator" since it measures the quality of price action.

BOP shows up on my screen as green when heavy accumulation or systematic buying is going on. It shows up as a red bar when heavy distribution or systematic selling is going on. Yellow is for neutral.

When I see a price rising to a recent high and I see red BOP, it tells me smart money is selling into the rally and I should probably sell going into resistance. If I see lots of green BOP, then it indicates to me that resistance may be broken and I can stick with the trade.

BOP helps you determine whether the supply-demand balance will be in your favor.

There isn't a way for me to show BOP using Stockcharts.

Again, it's not a "timing indicator," it's a "quality indicator." It measures the quality or strength and weakness of price movement.

For those of you who don't know about BOP, here is an explanation by Don Worden of Worden Brothers. BOP is a proprietary indicator of their's:

We do not use the terms accumulation and distribution simply as synonyms for buying and selling. Accumulation refers to the exercise of a systematic buying program over days, weeks or months. It is assumed that such buying is sizeable and usually well informed (although the latter is not a certainty). Distribution, of course, refers to systematic selling. We can often detect accumulation or distribution, but we have no way of knowing the motives of the parties behind any particular program. And we have no way of assessing their accuracy.

Systematic accumulation or distribution does not exist in all stocks at all times. Such programs are not necessary for stocks to rise or fall in price. An imbalance of supply and demand is generally the most direct basis for a price move, but underlying systematic programs may or may not be present.

BOP is an excellent detector of accumulation or distribution. It is not a reliable short-term indicator, because these programs occur over time. It can be assumed that the parties are trying their best not to, for example, "move" the price up while they are trying to accumulate a stock. MoneyStream is a better gauge of the changing balance between supply and demand in general. When it is outperforming the price, it can be assumed that stock is moving from weak to strong hands. When it lags price, stock is likely moving from strong to weak hands. TSV is the most sensitive to short-term movement and, of the three, is most affected by price movement. Price movement least affects BOP. As a matter of fact, the most definitive characteristic of BOP is its sometimes-incredible ability to contradict the direction in which price is moving.
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