An Overview of the Wyckoff Method: Part 3 - Distribution

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July 9, 2021, 11:24 PM UTC

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Wyckoff Distribution Method

So far we have discussed The history of Richard D. Wyckoff and Wyckoff's Five step approach to the stock market in An Overview of the Wyckoff Method: Part 1, and we have discussed Wyckoff accumulation events and phases in An Overview of the Wyckoff Method: Part 2 - Accumulation. In this article we will be discussing Wyckoff distribution events and phases.

Wyckoff Distribution Events

Preliminary Supply (PSY) -- Where shares are unloaded in quantity by large interests after pronounced upward movement. The volume expands and the spread widens. This is a signal that a change in market trend may be approaching.

Buying Climax (BC) -- The force of buying reaches a climax. heavy and urgent buying by the public being filled by professional interests at prices near the top. A Buying Climax (BC) usually coencides with good news, such as a great earnings report.

Automatic Reaction (AR) -- With substantially diminished intense buying after the Buying Climax (BC) and heavy supply continuing. The low selloff helps define the lower boundary of the distribution trading range.

Secondary Test (ST) -- The price revisits the area of the Buying Climax (BC) to test the balance of supply and demand at these price levels. The supply needs to outweigh the demand. The volume and spread should therefore decrease as the price approaches the resistance point of the Buying Climax (BC). On occasion, the Secondary Test (ST) takes the form of an Upthrust (UT) - when the price moves above the resistance represented by the Buying Climax (BC) - and in some cases, other Secondary Tests (ST)'s before quickly reversing to a close below the resistance. Prices will usually test lower than the boundary of the trading range, after an Upthrust (UT)

Signs of Weakness (SOW) -- Is a down-move to, or past the lower boundary of the trading range. this usually occurs on an increase of spread and volume. The Automatic Reaction (AR) and initial Signs of Weakness (SOW) are indicative that supply is now dominant, and the asset's price action. undergoes a characteristic change.

Last Point of Supply (LPSY) -- This represents an exhaustion of demand. This occurs after testing support on a Sign of Weakness (SOW). A feeble and narrowly spread rally indicates the market is having difficult time advancing. This may be due to one of three circumstances: Weak demand, substantial supply, or both.

Upthrust After Distribution (UTAD) -- This is the counterpart to the spring and terminal shakeout within the accumulation trading range. This occurs in the later stages of the trading range and provides a definitive test indicating new demand after a breakout above the trading range resistance. An Upthrust After Distribution (UTAD) is not a required structural element.

Wyckoff Distribution Phases

Phase A -- This phase marks the stopping of the prior uptrend. It's the first significant evidence that supply has reentered the market - indicated by the Preliminary Supply (PSY) and the Buying Climax (BC). These events are typically followed by an Automatic Reaction (AR) and a Secondary Test (ST) of the Buying Climax (BC) - However, the uptrend can also terminate with anticlimactic action. In these cases, the asset will demonstrate an exhaustion of demand, with a decreasing spread and volume. less upward progress is achieved per each rally before significant supply emerges.

Phase B -- The function of Phase B is to build a cause in preparation for a new downtrend. Professional interests and institutions are disposing of their long inventory and placing short positions in anticipation of an impending markdown. In this phase large interests are net sellers of shares as the trading range evolves. The end goal is to exhaust as much of the remaining demand as possible. This process indicates that the supply/demand balance has tilted away from demand and towards supply.

Phase C -- This phase may reveal itself with an Upthrust (UT) or an Upthrust After Distribution (UTAD). It is a price move above the trading range resistance, which quickly reverses and closes within the trading range. It is also a bull-trap, meaning it appears to indicate the redemption of an uptrend, but in actuality is intended to "fake out" unconfirmed break-out traders. Upthrust (UT) and Upthrust After Distribution (UTAD) allow large interests the oppertunity to mislead the public about the future direction of the trend, in order to sell additional assets at elevated prices to traders and investors before the markdown begins.

Some traders may wish to initiate short positions after an Upthrust (UT) or Upthrust After Distribution (UTAD). The risk/reward ratio can be quite favorable. However, the “smart money” repeatedly stops out traders who initiate such short positions with one Upthrust (UT) after another. It is often safer to wait until Phase D.

Phase D -- This phase arrives after the tests in Phase C show the last of the demand. During Phase D, price goes to or through the trading range support. The evidence that supply is dominant increases either with a clear break of support or with a decline below the mid-point of the trading range. After an Upthrust (UT) or an Upthrust After Distribution (UTAD) there are often weak rallies within Phase D. These Last Points of Supply (LPSY) indicate excellent opportunities to initiate profitable short positions.

Phase E -- Phase E depicts the unfolding of the downtrend. The asset leaves the trading range and the supply is in control. Once trading range support is broken on a major Sign of Weakness (SOW), this breakdown is tested with a rally that fails at or near support. This also represents a potential opportunity. Subsequent rallies during the markdown are usually weak. Traders who have taken short positions, can trail their stops as price declines. After a significant down-move, climactic action may signal the beginning of a re-distribution trading range or of an accumulation.

Thank you for reading along with us! Be sure to keep an eye out for part 4 of Overview of the Wyckoff Method series, in which we will discuss reaccumulating, redistribution and Wyckoff's "Composite Man"

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