Want to Know When the Big Operators are Buying?
Understanding how and why accumulation and re-accumulation processes take place gives us a much stronger and more effective approach to making trading and investment decisions in the financial markets.
An accumulation range is a lateral movement of the price preceded by a bearish movement on which an absorption manoeuvre is carried out by the big operators with the objective of accumulating stock in order to be able to sell it at higher prices in the future and make a profit from the difference.
During the development of the bearish movement that precedes it, control of the stock will be mainly in weak hands. In order to be able to turn a market, it is necessary for that stock to be controlled by the great professionals, by the strong hands.
As the price falls, the stock gradually changes hands; the more it falls, the greater the stock is in strong positions. It is during the development of the accumulation structure that the final process of absorption takes place. The moment at which the price is ready to start the upturn.
The law of cause and effect
It is in these range conditions where we see in operation the law of cause and effect 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.
In the case of the accumulation range, the purchase of stock (cause) will have the effect of a subsequent upward trend movement; and the extent of this movement will be in direct proportion to the time the price has spent building that cause (absorbing the stock).
The preparation of an important movement takes considerable time. A big trader can’t buy everything he wants all at once because if he executes an order with all the quantity he wants, he would get worse prices due to the displacement his own order would generate.
In order to perform this task, professionals need to plan and execute a careful plan with which to try to absorb all available stock at the lowest possible average price.
Maneuvers of manipulation
In the accumulation process, large operators create an environment of extreme weakness. The news at this point is likely to be bad and many will be influenced to enter the wrong side of the market. By means of various manoeuvres, they manage to make themselves little by little with all the available offer.
In the accumulation range we observe a fundamental event that characterizes this type of context since in many occasions it is the action that initiates the trend movement. It’s the bass shake, also known as “Spring.” It is a sudden downward movement which breaks the support level of the range and with which the big traders are used to carry out a triple function: To reach the stop loss of those traders who were well positioned on the long side; to induce for sale the ill-informed traders who think in the continuation of the downward movement; and to profit from such movement.
While it is true that this shaking event is an action that adds strength to the bullish scenario, it is also true that it will not always happen. You should be aware that on many occasions the development of the uptrend will begin without this terminal action. This is a context that is somewhat more difficult to determine but equally valid.
At the same time, they need to take the “weak hands” out of the market. These are traders who, if they are positioned to buy, will very soon close their positions assuming short profits; and this closing of buy positions are sales orders that the big traders will have to keep absorbing if they want to keep pushing the price. One action they take to get rid of this type of weak operator is to generate a flat, boring market context in order to discourage these operators from finally closing their positions.
Both the fact of reaching the stops of the purchase positions, as well as the entry in sale of some operators, provides liquidity to the professionals that are accumulating; since both actions execute sales to market; and these sales are the counterpart that the big operators need to marry their purchases.
In addition to this, when the bullish reversal occurs back into the range, stops will also be executed for those who entered with selling positions during the bearish break, adding strength to the bullish movement.
The path of least resistance
Professionals with interests above will not initiate the movement until they have verified that the path of least resistance is on the rise. This is achieved by carrying out various tests to check the level of commitment of the sellers.
As with Spring, they will initiate downward movements to verify the tracking it has. An absence of volume at this point would suggest a lack of interest in reaching lower prices.
This is why sometimes you see more than one jolt within the range; these are tests that professionals develop to make sure they won’t find resistance at higher prices.
Common characteristics of the accumulation trading ranges
The following are key features of the cumulation trading ranges:
- Decrease in volume and volatility as the trading range develops. There will be less and less stock available for sale and therefore price and volume fluctuations will be gradually reduced.
- Tests to the high zone of the trading range without volume, suggesting an absence of selling interest; except when the price is prepared to initiate the movement out of the trading range.
- Springs to previous lows; either over the support area or over minor lows within the trading range.
- Wider and smoother upward movements and bars than bassists. This denotes an influx of good quality demand and suggests that supply is of poor quality.
- Development of rising highs and lows. This sequence should already be observed in the last stage of the trading range, just before the start of the bullish jump. Denotes total control by buyers.
Beginning of the bullish movement
When there is no longer any stock to be absorbed, a turning point takes place. Value control is in the hands of the strong and they will only get rid of their positions at much higher prices. A slight increase in demand now would provoke a sudden upward movement in prices, initiating the upward trend.
The reaccumulation process is exactly identical to the accumulation process. The only difference between the two is the way the structure begins to develop. While the accumulation range begins by stopping a bearish movement, the reaccumulation range begins after the stop of an upward movement.
A reaccumulation is the result of a previous uptrend that needs to be consolidated. The hands that control the value will change during the course of the trend.
At the beginning of an uptrend, the value is under the control of very strong owners (professional traders, strong hands), but as it develops, the stock will gradually shift to less informed operators, weak hands.
At this point, it is said that the demand is of poor quality and the market needs to restart a process of stock absorption in which again it is the big operators who take control.
Duration of the structure
A key point to keep in mind is that the duration of this structure will be influenced by the percentage of strong and weak hands that have control of the value.
If at the beginning of the reaccumulation the value is still mainly in strong hands, the duration of the structure will be shorter. If, on the other hand, it is the weak hands that control most of the stock, a longer period of time will be necessary to be able to redevelop the purchasing process.
The objectives of the main accumulation will not yet be met and this structure is developed to add new demand to the market with which to continue the upward movement towards these objectives.
Reaccumulation or Distribution
A judicious analysis of price and volume action is very important in order not to make the mistake of confusing a reaccumulation range with a distribution range.
Both are initiated in the same way, after the stop of an upward movement. It becomes necessary to automate the characteristics of the accumulation trading ranges, as this is one of the most compromising situations that any Wyckoff operator will encounter.
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