PAC charting: a powerful tool in stock traders' arsenal

EXPERIENCED TRADERS know that they should always rely on multiple sources of information before entering a trade. Like candlestick patterns and technical oscillators, Price Activity (PAC) charts offer technical analysts a unique view on stock trading data. PAC charts are an innovative way of charting stock data and are a potent addition to any stock trader's toolbox.

PAC charts are unique in the way they represent "volume" (the number of shares traded every day). Traditional charts simply display volume data as an histogram on the bottom of stock charts. PAC charts on the other hand, track and compound estimated volume data at each price level and color-code this information directly in the stock chart. This effectively increases the information displayed on the chart by an order of magnitude!

PAC charts track the amount of shares ("volume") that were traded at each price point. When a lot of volume accumulates at a certain price point, the PAC chart will start showing areas of hotter colors (green, yellow, red). These zones of high volume accumulation represent high levels of investor emotion for the stock at that price and are the key to successful PAC chart analysis. An area of high volume accumulation could mean the start of an intense period of buying or selling, and usually at least marks the establishment of a new resistance or support level.

Knowing at which prices investors have bought their stocks is a critical piece of information when trying to determine a stock's future price.

For example, if many people buy a stock at $40 and it goes down to $35, many of these people will think "as soon as this darn stock goes back to $40, I'll get rid of it and at least get out even!". Then, when that stock does go back up to $40, these people will start selling, driving the price down again. If enough people bought the stock at $40, it will make it hard for the stock to go up past $40.

This phenomenon is traditionally known as "resistance", with its opposite (when a stock doesn't seem to go down past a certain level) known as "support". Before the introduction of PAC charts, it was up to an analyst to "guesstimate" the location and strength of support and resistance levels by hand-drawing lines over stock charts.

The importance of knowing the amount of shares owned at a certain level is hard to overstate. With PAC charts, resistance and support levels are, (as in real life) built in the data, not just hand-drawn approximations on a graph!

What follows is a few examples of the most common in recognizable patterns highlighted by PAC charts. While there is never any certainty when one is looking at market behaviors, these examples can serve as good starting points as to how PAC charts can be used.

Interpreting the color scale

It is important to understand that the color coding in PAC charts is relative. This means that if a stock's volume activity is evenly distributed, its PAC chart will contain many areas of green and red. However, if there is only one volume spike where there is a lot more activity than anywhere else on a graph, there will be only a single area in green or red, making it much more significant.

Strong breakouts

Lack of support

Many times, after a sudden surge, a stock will fail to create support at its higher level. Worse, heavy trading at the peak may create an area of resistance. In these cases, the stock very often falls back down to where the surge started, where it may bounce off the support level where the surge started or fall through even lower. This up-and-down pattern is one of the more frequent and easily identifiable patterns in PAC charts. For traders, there are many shorting opportunities right underneath the peak, as the breakdown begins, with a profit target right above the support level. This chart of Dell shows this pattern, with a strong breakout that unfortunately dies in a pretty strong selloff soon thereafter.