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Popular Screens 6: Large Players Buy

In this series we are discussing our popular screens a little bit more in depth. Also check out the introduction, which gives some general pointers.

This time, we will be covering the Large Players Buy screen.

This screen only has 2 filters:

  1. A minimum average volume of at least 1 million
  2. A 5DER or Daily Effective Ratio 5 Day Average above 4%

The minimum volume requirement is set because the underlying indicator (Effective Volume) will be less accurate for stocks trading low average volumes. You can find an introduction on Effective Volume here,  but in this article we will go a bit deeper into its practical usage.

Effective Volume and Effective Ratio.

Effective Volume is often misunderstood. Lets start with a quote from Pascal Willain, the inventor of EV:

Because EV goes up and down, and because it is based on volume, then the mistake is to believe that it represents a “force” of action. However, it only represents a disequilibrium in the “liquidity trading” activity of large investors.

Before decimalization, it was important to keep orders on the order book. After decimalization, it has become important to place orders as soon as liquidity was detected. This means that today’s market is a liquidity fight: action/reaction. Algos want to trigger levels, stops and boost liquidity in order to place their trade and be able to move volume.

When there is an important trend or a big price move, you will almost always see EV move on the opposite side, because funds use the available liquidity to adjust their position. In such conditions, EV is almost useless and even misleading.

EV needs to be used when price equilibrium is back in the markets:

  1. After a price move, when the stock enter into a base, EV will indicate the probable next price move.
  2. On a support/resistance line, EV might indicate how the stock will act: break the line or revert back.

We will make a couple of more points on Effective Volume and its interpretation:

  • Inside chartmill, it is best to only display the Large Effective Volume line (the red line). This is because both LEV and SEV are accumulated from their starting point, which may be years back. Because of this, the lines may be in totally different absolute area’s and will appear rather flat. Only displaying the red line paints a clear picture of the Large Effective Volume, which is what we are interested in.
  • When the red line goes up, we say ‘large players are buying‘, while it would be more correct to say: ‘we have more large players buying than we have large players selling‘, or even more correct: ‘the total volume bought by large players was more than the total volume sold by large players‘.
  • Because of how EV is calculated, the normal situation is that EV follows price. This is also the least interesting situation and should not be seen as large players supporting the move.
  • More interesting situations are when we have a divergence,  when EV does not follow price:
    • Inside base formations, when prices are nearly flat, EV will give a good indication of what large players are doing. This is definitely the most interesting EV use case.
    • Price goes up or down and EV goes the other direction. Although this does indicate that large players are selling strength or buying weakness, it does not necessarily mean that price will revert. Large players are using the increased liquidity to adjust their positions, but the last thing they want is price to revert while they are doing what they need to do. As goes for any technical setup: it is always best to wait for the reversal to actually take place before you consider a position.
  • When looking at Large Players Effective Volume, we typically look at what is happening in the last couple of days. Historical values for EV have little value. We want to know what large funds are doing at this moment or in the last couple of days.
  •  Large players buying or selling are no guarantee that price will follow. Large players also make wrong choices. I believe it was Pascal himself who mentioned something like: “Large players don’t always have it right, but I rather have them supporting my view than going in against them” in his book. 
  • Absolute values of the LEV line are of no value at all. Again, since LEV is accumulated each day, the region in which it is displayed today depends on the historical values.

Back to the screen.

The screen uses the ‘Large Effective Ratio’ to determine an increasing LEV line. The condition ’5DER > 4%’  implies that the Daily Large Effective Volume number is positive and above 4% of the total daily volume on average in the last 5 days.

As this screen does not contain any other filters, it will display all stocks showing decent accumulation. It is up to the user to filter out those stocks that also form bases or declines manually. This screen could easily be combined with other filters filtering for base formations or price stability.

Some results.

To bring this into practice, we will discuss some of the results we are getting when running the screen today.

STLDCDKSKXHZNP

Lets discuss each of these in some more detail:

  • STX: clearly, the breakout already happened, so this is no longer a valid setup. We selected this for pointing out the clear accumulation while the stock was still inside its based. (The base between 90 and 92). So in this case EV was a good predictor of the future direction of the move. Also note that before the gap, precisely the opposite was taking place: while the stock was rising, large players were selling.
  • CDK: same story here. This also had a breakout, but in the base before the breakout we say Large Players accumulating strongly.
  • STLD:  This is still inside a base formation, but we see large players have been buyers in the last couple of days. A potential strategy would be to place a buy stop order around 22.5
  • HZNP: A similar story here. The stock is pulling back. We even saw a -6% day in the last day, but large players are buying this. A potential strategy would be to buy when price breaks the 30 level again. Because the 30 level is still somewhat away it could be bought earlier on signs of recovery, which would make a tighter stop possible.