Wyckoff trading method, page-2416

This week I thought I look at Accumulation Zones, what to look for, and how they develop.

In most cases a 'text book style' Accumulation Zone occurs at the end of a long downtrend, and some sort of bad news event occurs on an individual stock level, a sector wide level, or even across the broader market, which causes price to dip sharply lower and challenge the existing holders emotions.   There will often be news across the media who are also reiterating the bad news, which will generally make the event appear even worst than it is, and cause even more angst to rattled holders, who may be now holding at a loss.
This event will usually see very high volumes being traded, and many longer term holders will look to 'get out' before their holding is worthless.

At the same time, there will be other market participants, often professional traders and investors,  who will now see value in the stock, because it is trading so much cheaper than it has done so for a long time, or ever.  They are less likely to let emotion affect their judgement, because they are not currently holders, and if they now consider it wise, they jump in and start strongly buying the stock.
What results is often called "Climactic Action", as the share trading has reached a 'Climax' in the short term.

Note on the chart below, the very high volume, and how price has obviously dipped down quite low, which would have seen many holders very concerned about the value of their holdings (causing a lot to sell - right at the lows).  But also note the buying which must have come in, and caused a close back near the highs of the bar.

Following this, the climactic trading has usually seen all the holders who were 'teetering on the edge of selling' prior to the event, all sell their holdings at the same time, and this then sees a temporary lack of supply at this level (a supply vacuum), and price will often rise in what Richard Wyckoff called an 'Automatic Reaction' (AR).  What has actually happened, is that because there are very few sellers left (temporarily - because they have all already sold out), and any buying see price rise easily of much lower volume.  So when you see Climactic Action, it is the Automatic Reaction that confirms both the strong buying within the climactic bar, and the temporary lack of supply that results shows that there is not much more serious supply left in the market at this level (when the AR does not develop properly, price may again continue lower, and even wash out the lows of the climactic bar, before seeing the AR occur).   The AR may last for a very short or a longer period.  What generally happens is that price rises until enough supply is drawn out to balance the demand, then the rise stalls out.   The highs of the AR often illustrate where fresh new supply lies, and forms the highs of the trading range that develops (this will be the level where a breakout may occur at a later date).

Price will usually work its way back down again after the AR is complete. It may or may not get all the way down to the absolute lows of the climactic bar, but it will almost certainly test down into the top half of the climactic bar.  The expectation at this point is for volume to be much less that what was drawn out previously.

Following this, if all is still going well, price will usually move a little higher, then back down lower, up and down in an action that is designed to encourage any further holders who maybe inclined to sell, to do so, as it will be these holders who will often sell into a price rise (or breakout), thwarting upward progress later, causing difficulties, so best if they are gone.  

Eventually price will move right up to the highs of the trading range, and may 'half heartedly' look to breakout on low'ish volume.
But will then pull back again for a final test for supply (selling), and if supply is low, an attempt at a breakout may occur, and if increased supply is drawn out, price will often pull back again, in an attempt to remove the sellers, before any attempt at a 'proper' breakout.
This pattern of pulling back to remove supply will usually continue until supply is shown to be low.

Finally, following a decent breakout above the trading range (high enough to show 'intent'), about 50% of the time, price will come back and test the strength of the breakout, before accelerating away.  The expectation is for selling pressure to be low, as price tests the strength of the trading range from above.



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Here is another accumulation (below).
The climactic action is clear.
However the AR is not so clear on this one, as more supply was drawn out, but the highs of the AR were respected.
Price then pulled back and tested down to the lows of the climactic bar, drawing out lower and lower volume (selling) as it did so.
Then price moved up and challenged the highs of the range, without much real intent (no clear push higher, no serious volume), and both times drew out some more supply, the second time 'much more'.  So in response price pulled back to challenge any more sellers to come out and do so, but there wasn't much.
Finally there was a little two bar shakeout, which did not find much supply either, and in response price broke out.


Finally note - that these two charts are showing 'very clear' illustrations of the accumulations that went on, they are not always this clear, and many may see a lot more 'false starts' before supply is really low.  And at other times a 'good news item' is released before all the supply has been mopped up, which causes price to breakout before it is really ready, and it either draws out too much supply and has to come back down to the sideways range again, or does not move higher with ease, and only makes a stunted breakout (and the accumulators may eventually sell out early, and move on).

Hopefully this was helpful, put any questions on the thread, and tag me in.

cheers