Let's say you're looking for a place to eat in an unfamiliar town.
It's encouraging to spot a restaurant that's on the busy side, even a little crowded. You probably would rather eat there than at a place that's totally empty, unable to attract a single patron.
In a similar vein, IBD has long said that if you're an investor looking for a stock to buy, stick with those showing accumulation. Simply put, accumulation just means big investors are buying.
The opposite of accumulation is distribution, which refers to institutional selling. So a stock under accumulation is akin to a restaurant that's drawing a good number of diners.
When a stock is catching its breath and sketching a new consolidation, you should examine that pattern for accumulation. You want to see more weeks of accumulation than distribution.
If you see an up week with above-average weekly volume, that's a week of accumulation. Conversely, a down week with above-average weekly volume is a week of distribution.
But here's one wrinkle. If a stock closes in the upper 60% of its trading range for the week, even if it was a down week, you still consider that accumulation, provided volume is above average for the week. This is especially true when it happens in the left (declining) side of the base.
It's viewed as institutional buying because the stock has shown some strength by finishing well off its low for the week.
An example often helps, so look at Biogen Idec's (BIIB) action in late 2010 and early 2011.
The biotech began to form a 10-week flat base with a down week in late December. (1)Volume was light for a few weeks, and then the stock saw accumulation in the week ended Jan. 21, 2011. (2) There was distribution during the next week, (3) but that was followed by accumulation in the week after that. (4)Then, there was more light volume, resulting in a base that had two weeks of accumulation and one week of distribution. Overall, the pattern had net accumulation of one week.
You want to see this kind of net accumulation, since it signals more investors are opting to take a bite rather than pass — setting a good foundation for a breakout.
For Biogen, the breakout came the week ended March 4, 2011. (5)