The Wyckoff Method is a technical analysis approach used to understand market behavior based on price, volume, and time. It divides market movements into distinct phases and events that represent the interplay between supply and demand. Here’s an overview of the key Wyckoff events and phases:
The Four Phases of a Market Cycle
1. Accumulation
This phase occurs when institutional investors are building long positions. The market trades sideways in a range as supply and demand reach equilibrium.
Goal: Prepare for a future uptrend.
2. Markup
The market enters an uptrend as demand overwhelms supply. This is the period of significant price appreciation.
Goal: Institutions drive prices higher as they distribute inventory at higher prices.
3. Distribution
The market trades sideways again, as institutions offload their positions to retail traders at elevated prices.
Goal: Prepare for a future downtrend.
4. Markdown
The market enters a downtrend as supply overwhelms demand. Prices fall significantly.
Goal: Institutions prepare for the next accumulation phase.
Key Events in Each Phase
Accumulation Phase
1. Preliminary Support (PS):
The first signs of buying interest after a downtrend. Volume increases, but prices continue to decline.
2. Selling Climax (SC):
A sharp drop in price with heavy volume marks the end of the downtrend. Institutions absorb supply.
3. Automatic Rally (AR):
A bounce occurs as selling pressure decreases. This defines the top of the trading range (TR).
4. Secondary Test (ST):
Price revisits the SC area to test supply. Volume and price spreads are lower than at the SC.
5. Spring (Optional):
A false breakout below the TR to trap sellers. This creates liquidity for institutions to buy.
6. Sign of Strength (SOS):
A strong price movement with increased volume, indicating the start of a markup phase.
7. Last Point of Support (LPS):
The final low before the uptrend, confirming demand dominance.
Markup Phase
1. Jump Across the Creek (JAC):
Price breaks above resistance levels with strong momentum.
2. Backing Up to the Edge of the Creek (BU):
A pullback to test the breakout zone before continuing higher.
Distribution Phase
1. Preliminary Supply (PSY):
Early selling interest appears, and volume increases, but prices remain in an uptrend.
2. Buying Climax (BC):
A sharp rise in price accompanied by heavy volume marks the end of the uptrend.
3. Automatic Reaction (AR):
A sharp drop in price defines the bottom of the TR.
4. Secondary Test (ST):
Price retests the BC area with diminishing momentum.
5. Upthrust (UT):
A false breakout above the TR to trap buyers.
6. Sign of Weakness (SOW):
A strong price movement down with increasing volume, indicating the start of the markdown phase.
Markdown Phase
1. LPSY (Last Point of Supply):
The final high before the downtrend continues.
2. Downtrend Begins:
Price moves downward as supply dominates demand, typically with lower highs and lower lows.
Application of the Wyckoff Method
• Identify the phase and events within the market cycle.
• Use volume and price action to confirm each phase.
• Combine with other technical tools like trendlines and moving averages for enhanced analysis.