11. Market phases

The market moves in 3 phases:

  • Distribution
  • Re-distribution / Re- accumulation
  • Accumulation

As you can see in this example, the market moves in a 3-phase pattern as it is trending – you can see it clearly on both lower and higher time frames, that the

market is divided into 3 phases. In a strong trend, after the third phase the market again pulls back to create 3 more phases and gets higher and higher in an uptrend and lower in a downtrend.

-Accumulation Phase

During a bull market, the accumulation phase begins when the informed investors (experienced traders and institutions) usually enter their positions. The price movements during the accumulation phase are slow. The accumulation phase often falls into the end of a downward trend where ordinary investors believe that there is more bearish movement on the horizon and the outlook is generally pessimistic.

For the smart money, however, it can be a good idea to enter such a market if the price is low. At the same time, this does not mean that a trader must try to choose a bottom during a bear market; that makes the handling of the accumulation phase difficult. During the late stages of a bear market, a trader should pay attention to longer periods of consolidation, a shift of how swing highs and lows manifest themselves in the charts which is another important issue of the Dow Theory. Technical plays and patterns during an accumulation phase may also be different on momentum indicators, broken consolidation channels that indicate breakouts, (reverse) head and shoulders patterns and other transition modes.

Re-Accumulation/ Re-Distribution Phase

As soon as the price leaves the accumulation phase and the new trend becomes visible, the phase of Re-Accumulation begins. Here, more and more investors are joining the trend and ensuring higher prices. Usually, the phase of Re-accumulation is accompanied by real economic data. The longer the trend lasts, the more investors enter such a market, and this is also the stage where so called “trend-following” or “momentum” traders will receive signals from their trading methods to enter.

The Excess phase

The Re- Accumulation / Re-Distribution phase is the longest of the three market phases and at the end of it you often see an excessive phase in which the trend accelerates even further. During the surplus period, euphoria and irrational optimism often appear in the market, which leads to “bubble” like behavior. The

last of the uninformed buyers enter the market at such a stage without knowing that the end might be near.

During the surplus phase, the ‘smart money’ starts to relax their positions because such markets are vulnerable and things can become hectic and extremely volatile. A trader should always be aware of the warning signs of this phase, such as significant downward pressure, increasing volatility, deeper pullbacks and when upward trend waves lose their power.

-Distribution Phase

The distribution phase is the origin and the initial phase of a bear market. While the informed traders settled their long positions during the excess phase, they will now take new short positions during the distribution phase. At this stage, the market is often overbought, although the uninformed traders still believe that more bullish pressure is coming.

At the same time, a trader, without a proper understanding of market phases, should be aware that he is not only picking a top during a bull market, but also an unclear consolidation during a bull market for a distribution phase can be a expensive mistake. The trader has to look for special signals such as long-term concentrations, decreasing purchase attempts, head and shoulders patterns, new outbreaks from long distances and signs that the price is making lower lows and lower peaks.

Homework Assignment:

Submit 2 charts from which the Market Phases are clearly drawn.

error: Content is protected !!