Lot of times, we hear this phrase - Smart money is accumulating and price-volume breakout on the upside may happen anytime OR smart money is selling and price-volume breakout on the downside may happen anytime. But the issue is - How can we spot such patterns on a chart?
The issue of Accumulation or Distribution comes when stock consolidates after a strong price move either up or down. During consolidation, stock price does not make any progress, but they do not do any damage either. Consolidation has a tendency to create lot of anxiety. It is also called as tug of war between smart money and dumb money. On TV channels, you will see lot of analysts interpreting the consolidation as accumulation or distribution. And by the time we know it, it is too late to act. There are only two things that matter on chart, price and volume. Volume action precedes price action. So, one should keep an eye on volume to determine price move. It is the duty of the leader to lead. The opposition only offers resistance. In an up trending market, bulls are in charge; and in down trending market; bears are in charge. So, if the stock/market is in uptrend, then it is the duty of the bulls to take the stock/market up. Similarly, if the stock/market is in downtrend, then it's the duty of bears to take the market down. The job of the opposite party is to only offer resistance. The resistance gets reflected in volumes.
Let's say a stock/market is in uptrend - And after a strong price move, the stock/market has entered in a consolidation mode. It's the time when some people decide to book profits (but they are in minority), and new set of buyers are not willing to jump in yet big time. The stock gets into slumber - and there is no significant price move either up or down. The volume dips. Generally, it means, sellers are not offering significant resistance, and all the minor selling (resistance) is getting absorbed strongly. And then one day, buyers jump in big time in the stock/market, and sellers do not offer much resistance, and price break out on the upside.
The reverse happens in distribution. The resistance gets stronger. Distribution occurs when volume picks up but there is no price progress. This could indicate that sellers are getting a little tougher with the buyers, and selling big time, and buyers are finding it hard to counter that force. This becomes little dangerous and can be easily spotted on the price-volume chart by looking at the volumes. If during consolidation, volumes are high but there is no change in the price - it’s time to book profit or have tight stop loss. This happens because of institutional selling into strength and often precedes a substantial sell off that occurs few days later.
Another point to note - Distribution (High volume days with no price move) happens for at least few days before the actual breakdown day. So, one should not get perturbed by single day of distribution, but should get cautious. So, in simple words, Accumulation means low volume days followed by big price-high volume day whereas distribution means high volume days with no price move. Since, in bull market, you give benefit of doubt to bulls - the way it works - if it is not distribution, then its accumulation. So, the best way to spot - Look for signs of distribution. In downtrend, it's the buyers who offer the resistance. Accumulation means substantial volume pick up without price declines. It means all the selling is getting resisted by buyers; and sellers may be soon out of energy, whereas Distribution means drop in volumes after a sell off. It means buyers are still not willing to step in big time, and even small buying is getting sold into and sellers still have the energy to take the market down. So, the next time when stocks consolidate, keep an eye on the volume to determine the next move.