This is my third post about Wyckoff method. Last week we got to know how to identify accumulation zone and learned accumulation phases. Today I want to tell you about distribution phases.
Phase A: This phase marks the stopping of uptrend. Till that time demand has been dominant and the first significant evidence of supply entering the market is provided by preliminary supply (PSY) and the buying climax (BC). Usually next what we see is a sharp, but limited move down – so called automatic reaction (AR) and then a small leg up, known as a secondary test (ST) of the BC. Volume in this phase is usually diminished. That classic scenario by wyckoff Method. But as can say from my experience the uptrend may also terminate without climactic action, instead demonstrating exhaustion of demand with decreasing spread and volume, and with less upward progress made on each rally before significant supply emerges.
Phase B: This phase can be marked as building a cause in preparation for a downtrend. That is time when big players review their portfolio and initiate short positions in anticipation of the next markdown. As you already know, you can find information about their positions and open interest in COT reports.
Phase C: That is the most interesting phase of distribution. Main events are upthrust (UT) – move of price above TR and sharp reversal down and closing in TR. That is the time when all beginners go long. Yup, the worst time to go long – one of the most popular traps all get into. In a few words, phase C – is the phase of misleading retail traders – bulls and bears as well. aggressive traders open shorts after UT, as they have very good risk/reward ration. But big players are not ready to allow retailers make money so easy. That is the reason why very often you can see few UT one after other. It’s a stop hunters in action. Conservative traders wait to open shorts until phase D and an LPSY.
Phase D: So, all tests are done and here you go – Phase D in a play. It shows us the last gasps of demand. Nothing special – price go to or through TR support. The evidence that supply is clearly dominant increases either with a clear break of support or with a decline below the mid-point of the TR after a UT or UTAD. In chart it looks like multiple weak rallies and moves down. The best trading strategy in phase D is to go short at LPSY. Besides, it’s the last opportunity for those, who hold long positions, to close it with small loss and go short.
Phase E: And finally in phase E price leaves the TR and supply is in control. Once TR support is broken on a major SOW, this breakdown is often tested with a rally that fails at or near support. This also represents a high-probability opportunity to sell short. Add trailing, replace sl to entry point and relax till climactic action will take place. As it may be signal the beginning of a re-distribution TR or of accumulation. Any way, the best you can do for yourself is to protect profits and look for next opportunity.