Phase A – The End of a Down Trend.
Supply has been greater than demand to this point, and prices have been falling, but signs of supply exhausting are shown by the Preliminary Support (PS) and the Selling Climax (SC), where the wider spreads and an increase in the volume show the absorption of positions by the large institutions.
Once selling pressure is exhausted, the Automatic Rally (AR) follows, which shows both an increase in institutional demand as well as the closing of short positions.
The secondary test follows to test the downside and usually has less volume and a narrowing spread.
The lows of the selling climax and secondary test with the high of the automatic rally set the initial boundaries of the trading range.
Drawing lines in these areas allows the trader to focus more clearly on the market behaviour around these areas of interest.
Phase B – Building a Cause
Previously we covered the 3 fundamental laws of analysis. The law of cause and effect is reflected here in that in phase B. We are building a cause for the start of a new uptrend,
The institutions or Composite Man is accumulating positions at a low price in anticipation of the Markup phase.
There can be multiple secondary Tests (ST) in Phase B, as well as testing of the upper end of the trading range,
Composite man’s goal is to acquire as much of the available supply as possible. As phase B evolves, the swings tend to be less pronounced and accompanied by decreasing volume. When all the floating supply appears to have been absorbed, it is likely that there is enough of a cause, and the trading range is ready to move into Phase C
Phase C – The Test
In phase C, the asset goes through a process of testing the remaining supply.
This can be by reaching toward the top of the trading range with higher highs and lows (Accumulation Schematic 2) or may break through the bottom of the trading range with a spring or shakeout (Accumulation Schematic 1).
The Spring or Shakeout in Accumulation Schematic 1 is often the more preferred as this is clearer that the remaining supply has been fully absorbed and creates a false impression of the downward trend continuing.
Phase D – Confirms Analysis
If we are correct in our analysis to this point, what should follow is a consistent increase in demand. This is shown through a pattern of advances (SOSs) with widening price spreads and increasing volume, as well as reactions (LPSs) on smaller spreads and diminished volumes. During Phase D, the price will move at least to the top of the Trading Range.
Phase E – Leaving The Trading Range
In Phase E, price leaves the trading range, demand is in full control, and it is obvious that the markup has started. Any pullbacks are usually short-lived.