Do You Want to Know When Large Operators Are Buying?

An accumulation range is a lateral price movement preceded by a bearish movement upon which an absorption maneuver is carried out by large operators with the objective of accumulating stock to be able to sell it at higher prices in the future and profit from the difference.

Accumulation schematic with its main events

It is in these range conditions where we see the law of cause and effect operating in trading; which tells us that for there to be an effect, there must first be a cause that originates it; and that the effect will be in direct proportion to the cause.

The preparation of an important movement takes considerable time. A large operator cannot buy everything they want at once since executing an order with the full desired quantity would result in worse prices due to the displacement their own order would generate.

To carry out this task, professionals need to plan and execute a careful plan with which they try to absorb all available stock at the lowest possible average price.

Both hitting the stops of long positions, as well as the entry into short of some operators, provides liquidity to the professionals who are accumulating; since both actions execute market sells; and these sells are the counterparty that large operators need to match their buys.

In addition to this, when the bullish reversal occurs back toward the interior of the range, the stops of those who entered with short positions during the bearish breakout will also be executed, adding strength to the bullish movement.

What are the conditions that need to be in place before a long and sustained bullish movement?

Stock exchange (absorption) process in an accumulation schematic

This is an important question to answer because when a stock has a larger, better and faster rise compared to other stocks, it is not a random accident.

When large informed interests determine that a company's shares will be substantially held in their portfolio, a campaign is planned. The purpose is to acquire a large number of shares at a favorable price with the expectation that the company will experience dynamic growth and push the share price to a much higher level.

Stock Exchange (Absorption) Process in an Accumulation Schematic

The initial phase of the campaign is to absorb the number of shares they are targeting. Planning is required since accumulation of the desired quantity could take many months. The goal is to buy those shares without drawing attention to their activities.

They cannot hide their actions forever and will eventually be discovered. The first big buyer will appear during the Selling Climax or shortly after, and has the greatest advantage in accumulating shares quietly.

A Selling Climax is accompanied by large quantities of shares being sold. As the accumulation phase progresses, it becomes more difficult to buy a large number of shares and requires greater trading skills.

Throughout the accumulation phase there is a large supply of shares for sale. With careful planning and execution, professionals try to absorb those shares at the lowest possible average price.

As the accumulation phase develops this becomes increasingly difficult to do. Wyckoff was intimately familiar with the methods professionals used and knew that their footprints could not be hidden on the chart.

Absorption is the key characteristic of the accumulation phase. The professional absorbs shares, like a sponge, at a good price/value with the intention of holding them for a long period.

The only scenario that would cause the professional to sell those absorbed shares would be much higher prices. If the Composite Operator absorbs, buys and locks up most of the available floating supply, what happens to the share price? Once the asset is in strong hands, available supply will be low and a slight increase in demand will cause the asset price to jump. The bullish trend begins. This is when the Wyckoff operator focuses on buying shares to accompany the large informed interests.

Hedge fund managers control a large amount of money in assets; there is no doubt they are the most skilled. They compete with each other to be the first to initiate campaigns and jointly allocate a large amount of capital in stocks and other asset classes.

These types of Composite Operators are also competing with other extremely skilled institutional investors (mutual funds, pension plans, ETFs). Remember, not all institutional investors are Composite Operators and not all Composite Operators are institutional investors.

The asset is bought on weakness as price falls from the ceiling of the accumulation range to the floor. Support at the base of the range is the result of large buying activity by the Composite Operator and this can be seen in the volume spike.

A range is a battle between supply and demand. Volume increases at the top of the range suggest supply is evident, and it must be absorbed before any significant bullish trend begins.

Volume and volatility will decrease as the accumulation range develops. Many stocks develop ranges that are not actively absorbed by strong hands. These stocks will not show the attributes of accumulation and will continue in a trendless pattern for a long time.

After the stopping action, this next phase is an insufferably long period of time for the trader/investor. Volatility is high and prices are low, which guides the retail investor to capitulate by abandoning and closing their position. Meanwhile, the Composite Operator systematically uses this environment to buy stock.

Throughout all this back-and-forth action, the Wyckoff operator is patiently waiting on the sidelines until the moment when the asset is ready to begin the bullish trend.