A market has several distinct stages: accumulation, distribution and run up or run down between these stages.
About 85% of the time a market is in either an accumulation or distribution range. Needless to say, the most bullish news comes out when a market is in the distribution stage and the most bearish news appears when it is being accumulated. If one is to make money on these moves he must learn to ignore all the news and see what the chart pattern is telling. The big money will tip their hand if one knows what to look for.
Formation of a base
Phase 1 :- This phase is characterized by extremely heavy volume followed by a sharp rally of several days duration. Unless you have this sharp rally, the question is still open regarding whether or not the downturn is over. After this sharp rally the commodity will come back down to test the bottom area and may hold at a higher level or make a slightly lower bottom. This is commonly called a secondary test.
Phase 2 :- The market will now enter a stage where supply and demand are essentially equally balanced. If this is an accumulation range, the volume will begin to increase on the up days and be somewhat less on the down days. Towards the end of this phase, the tops and bottoms may be higher than previous rallies and reactions.
Phase 3 :- This phase can take one of two forms:
- A market will move out to what is referred to as a spring board. It will move up to a previous high on slightly less volume and then back off to perhaps a 50% correction of the last up move. Volume will be very low. You then have an expansion of spread and volume on the upside. It moves out on the upside for a beginning of the move.
- A market may have a ” terminal shakeout”. This is characterized by breaking below the entire range with an increase in volume. This is followed by an equally rapid recovery of the entire loss. It may then back off slightly, go dead and then take off with expanded volume and thrust. The terminal shakeout traps the new shorts and can quickly result in significant loss. This can be guarded against by using closely placed stop orders and reversing positions when the terminal shakeout becomes apparent.
Distribution
Phase 1 :- Three drives to a top place the market in an area for potential distribution. The first reaction will be the steepest one yet in the rise to the top and will have heavy volume.
Phase 2 :- This phase will have supply and demand about equally balanced. Volume and thrust will begin to pick up on the downside. Lower tops will become evident.
Phase 3 :- Market will have a decided show of weakness and will generally be followed by a feeble rally. At this point it is on what is sometimes called a reverse springboard. It then begins a run down in earnest.
Three drives to a Top or Bottom
Markets will generally have three drives to a top or a bottom. They are usually characterized by a shortening of the thrust and heavier volume with each succeeding thrust.
After these three drives, a market will enter into sideways movement.
Three drives at top or bottom indicating reversal
After a market has moved in a primary direction by a good amount, if it then has 3 drives in the reverse direction, a reverse movement may be anticipated.
Will an old high stop a movement
How a stock or commodity approaches an old high can give some idea whether the old high will hold or the market will move on through to new highs. If the move is made slowly and deliberately, there is a good chance it will go on through. Note the volume, spread and closings.
Volume :-
- Excessive volume is bearish, particularly if spread is narrow.
- Low volume can also be bearish, as it implies lack of steam in the boiler.
- Average volume is just right and implies quiet accumulation for a bull move.
Spread :-
A wide spread and low close indicates heavy supply in the area, which will probably overcome the buying power and turn the price down.
Closings :-
Low closings in the spread are bearish. High closes are bullish, particularly if there is a lifting of support points.
Thrust
Thrust is defined as the net result of effort. As the thrust decreases, we may infer that the stock/commodity is “running out of steam” and a reversal may be anticipated.
