Phase A – The End of an Uptrend.
Inverse to that of accumulation, Phase A in a distribution trading range marks the weakening of the uptrend. Also, this phase has an increase in the trading Volume.
Demand has, until this point, been pushing prices higher, and with the event of the Preliminary Supply (PSY) and Buying Climax, we have evidence of supply entering the market.
Once buying pressure is exhausted, the Automatic Rally follows as a bounce, which shows both an increase in institutional supply as well as the closing of buy positions.
The Secondary Test follows to test the upside and usually has less volume and a narrowing spread. The highs of the Buying Climax and the lows of the Automatic Rally set the initial boundaries of the trading range.
Drawing lines in these areas allows the trader to focus more on the market behaviour around these areas of interest.
Phase B – Building a Cause
The purpose of Phase B remains the same as in accumulation, to build a cause, this time, however, in preparation for a new downtrend.
In phase B, we are building a cause for the start of a new downtrend. Institutions Traders or the Composite Man distribute their positions (sell their long positions) at a high price in anticipation of the price moving lower in the Markdown Phase.
The price at this phase stays in consolidation, but it can test the boundaries of the trading range and create fake breakouts. Also, there can be multiple Secondary Tests in Phase B as well.
The purpose of phase B is the same as that of accumulation and distribution, except this time, it aims to absorb as much of the remaining demand as possible.
The Composite Man’s goal is to acquire as much of the available liquidity as possible. As phase B evolves, the swings tend to be less pronounced and accompanied by decreasing volume.
When all the floating Demand of liquidity is absorbed by the floating supply, it is likely that there is enough of a Cause, and the price is ready to move into Phase C.
Phase C – The Test
In phase C, the asset goes through a process of testing the remaining demand. The price collects any remaining liquidity above the Buying Climax, which is called “Upthrust”. The Upthrust usually stops out traders (Fake Breakout) before any real move to the downside occurs.
The Upthrust in the Distribution Schematic is often preferred as this is clearer that the remaining demand has been fully absorbed and the run on liquidity has been completed. However, sometimes, the Upthrust does not occur if the trend is weak, but the Distribution Schematic would still be valid.
