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HomeECONOMIC & FINANCEFormation of consolidation according to Wyckoff

Formation of consolidation according to Wyckoff

Phase 1 : Stopping the previously dominant trend. The offer prevailed. Decrease in supply is indicated by preliminary support (PS) and sales climax ( SC ). These events are visible on the charts, where widening spreads and high volume reflect the transfer of a huge number of shares from one speculator to another. As soon as sellers weaken, an automatic rally (AR) follows, consisting of both demand for stocks and covering short positions (two types of ogrok are activated). A successful secondary test (ST) in the SC area will show a decrease in sales, as well as a narrowing spread and a decrease in volume , usually stopping at the same level as SC . If ST falls below SC , either lows renewal or consolidation formation can be expected. The SC and ST minimums and the AR maximum set the boundaries of the TR . Levels can be drawn to help see the market as shown in the two accumulation charts above.

Phase 2 : In Wyckoff’s analysis, Phase B acts as a “cause-building” for a new uptrend (see Wyckoff’s Law # 2 – “Cause and Effect”). In Phase 2, large players accumulate relatively inexpensive stocks in anticipation of a mark-up. The accumulation process can take a relatively long time and includes buying stocks at lower prices and checking for price increases by short selling (false breakouts). Typically during phase 2 there are multiple STs as well as upward actions at the upper end of the TR . In general, as TR develops to acquire most of the remaining supply, the majority of its interests are net buyers of shares. Buying and selling impart a characteristic up and down price movement to a trading range (flat).

At the beginning of phase 2, the average true range is wide and accompanied by a large volume . However, as the professionals absorb the supply, the volume of the downward swings within the TR may diminish. When it turns out that stocks are likely to be depleted, the market is ready for Phase 3.

Phase 3 : The instrument goes through a critical review of the remaining supply, allowing the big players to make sure the instruments are ready for growth. As noted above, a spring is a price movement below the TR support level (set in phases 1 and 2) that quickly reverses and returns back to TR . This is an example of a false breakout. In reality, however, it marks the beginning of a new uptrend after grabbing liquidity, delaying late sellers. In Wyckoff’s method, a successful test of the supply, represented by a spring (or shake out), provides an opportunity for higher expectation trading. A low volume shake test indicates that the instrument will be ready to go long, so now is a good time to enter at least a partial long position.

Phase 3 : There is a constant predominance of demand over supply. This is evidenced by the promotion model (SOS) with widening price spreads and increasing volumes, as well as the reaction ( LPS ) to smaller spreads and reduced volumes. During phase 3, the price will advance to at least the top of the TR . The LPS in this phase is a great place to go long.

Phase 5 : The instrument leaves the TR zone, growth is forming, as demand is under complete control. Shakes and more typical reactions are usually short-lived. New higher-level TRs , involving both profit-taking and consolidation by large players, can occur at any time in Phase 5. These TRs are sometimes referred to as “stepping stones” on the path to even greater


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