Today, we continue to study Wyckoff Method. So, let’s have a deeper look into accumulation phases.
Phase A: This phase is a sign previous downtrend has ended and means booking profits and closing of short positions. Up to this point, supply has been dominant. The approaching diminution of supply is evidenced in preliminary support (PS) and a selling climax (SC). Usually, this events can be easy to see on the bar charts, where widening spread and heavy volume depict the transfer of huge numbers of shares from the public to large professional interests. An automatic rally (AR), consisting of both institutional demand for shares as well as short-covering, typically ensues after strong selling pressures . Next what we see in Phase A is a successful secondary test (ST) in the area of the SC. But ST usually shows less selling than previously and a narrowing of spread and decreased volume, generally stopping at or above the same price level as the SC. ST, AR and SC create consolidation zone of the market. Sure, sometimes we can see sharp reversals without consolidation. But now we are trying to figure out clear indication of downtrend reversal.
In Wyckoff analysis, phase B serves the function of “building a cause” for a new uptrend. Main sign of this phase is accumulation of positions by institutions and you can always see open interest in COT reports
. The process of accumulation can take from few weeks to almost a year. But usually it takes 3 – 6 weeks. the longer it takes the more ST we will see in phase B. Early on in Phase B, the price swings tend to be wide, accompanied by high volume. As the professionals absorb the supply, however, the volume on downswings within the TR tends to diminish. Phase B is the longer phase of accumulation. When it appears that supply is likely to have been exhausted, the market is ready for Phase C.
This phase takes less time. Main function of this phase is to test the remaining supply, allowing the “smart money” operators to ascertain whether the market is ready to be marked up. Very often you can see so called “spring” – it is a price move below the support level of the TR
established in phases A and B that quickly reverses and moves back into the TR
. Other words, it’s a false breakdown
It is an example of a bear trap because the drop below support appears to signal resumption of the downtrend. But you are smart traders and use this high-probability trading opportunity to go long ?
Phase D: The next what we can see after “spring” is consistent dominance of demand over supply – SOS. This is evidenced by a pattern of advances (SOSs) on widening price spreads and increasing volume, and reactions (LPSs) on smaller spreads and diminished volumes. The price moves at least to the top of the TR. LPSs in this phase are generally excellent places to initiate or add to profitable long positions.
Phase E: In phase E, the market leaves the TR, demand is in full control, and the markup is obvious to everyone. Pullbacks are very small during this phase. New, higher-level TRs comprising both profit-taking and acquisition of additional shares (“re-accumulation”) by large operators can occur at any point in phase E. These TRs are sometimes called “stepping stones” on the way to even higher price targets.