Want to Know When the Big Operators are Selling?
We study in depth how and why the processes of distribution and redistribution of stock in financial assets are developed on markets around the world.
Distribution trading range
A distribution trading range is a lateral movement of the price which manages to stop an upward movement and in which there is a process of selling stock by well-informed professionals, who have interests at lower prices. They try to store a great position in order to get rid of it at lower prices and get a return for it.
The law of cause and effect
It is in these range conditions where we see in operation the law of cause and effect so cooked in the world of 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 distribution trading range, the sale of stock (cause) will have the effect of a subsequent downward 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 large trader cannot build his entire position at once because if he executes his sell orders with an order containing all the quantity he wants, the very aggressiveness of the order would shift the price downwards until he finds the necessary demand with which to match his sell orders and this would lead to worse prices.
In order to perform this task, professionals need to develop and carry out a careful plan with which to try to absorb all available market demand at the highest possible average price.
Maneuvers of manipulation
During this distribution process, the large operators, supported by the media (often at their service) generate an environment of extreme strength. What they are looking for with this is to attract as many traders as possible since it will be the purchases of these traders who will give the necessary counterpart to match their sales orders.
Misinformed traders don’t know that strong professionals are building a great selling position because they have interests below. You’ll be entering the wrong side of the market. By means of various manoeuvres, they are able to make themselves little by little with all the available demand.
In the distribution range, as in the accumulation range, we will be presented with the fundamental event of the shock. While it is true that not all structures will see this action before starting the trend movement, the fact of its presence adds great strength to the scenario.
In the case of a bullish shock, the Wyckoff methodology calls it “Upthrust”. This is a sudden upward movement which breaks the resistance level of the range and with which large traders are used to carry out a triple function: Reach the stops loss of those traders who were well positioned on the short side; induce in buy to ill-informed traders who think in the continuation of the bullish movement; and profit from such movement.
At the same time, they need to take the “weak hands” out of the market. These are traders who, if positioned for sale, will very soon close their positions assuming short profits; and this closing of sale positions are buy 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.
The professionals who are building their position are obliged to carry out this type of manoeuvre. Due to the magnitude of their positions, it is the only way they have to be able to operate in the markets. They need liquidity with which to match their orders and the jerk event is a great opportunity to get it.
The stop jumping of sell positions, as well as traders entering long, are buy orders that must necessarily be crossed with a sell order. And indeed, it is the well-informed traders who are placing those sales orders and thus absorbing all the purchases that are executed.
In addition, when the bearish reversal occurs after the shake, the stops of those who bought will also be executed, adding strength to the bearish movement.
The path of least resistance
Once the development of the range is coming to an end, the great professionals will not initiate the downward trend movement until they can verify that effectively the path of least resistance is down.
They do this through tests with which they evaluate the buyer’s interest. They initiate upward movements and depending on the second participation (this will be observed by the volume traded in that movement) they will value if demand remains available or if on the contrary the buyers are exhausted. An absence of volume at this point would suggest a lack of interest in reaching higher prices.
This is why you sometimes see more than one jolt in the trading range; these are tests that professionals develop to make sure they won’t find resistance at lower prices.
Common characteristics of the distribution trading ranges
The following are key characteristics of the distribution ranges:
- High volume and volatility during range development. Wide price fluctuations will be observed and the volume will remain relatively high and constant.
- Tests to the lower zone of the range without volume, suggesting an absence of buyer interest; except when the price is prepared to initiate the movement out of the range.
- Upward jolts to previous highs; either over the resistance area or over minor highs within the range.
- Wider and more fluid bass movements and bars than bassists. This denotes entry of quality supply and suggests that demand is of poor quality.
- Development of decreasing maximums and minimums. This sequence should already be observed in the last stage of the range, just before the start of the bearish jump. What he’s suggesting is that the bassists are being more aggressive.
Beginning of the Bearish Movement
When demand is no longer available, 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 lower prices. A slight increase in supply now would provoke a sharp downward movement in prices, initiating the downward trend.
The redistribution phase is a range that comes from a bearish trend and is followed by a new bearish trend. Multiple phases of redistribution can occur within a large bear market. This is a pause that refreshes the value to develop another downward movement.
Redistribution or accumulation
This type of structure starts the same as the accumulation trading ranges; therefore a very judicious analysis is necessary in order not to lead to erroneous conclusions. This aspect is undoubtedly one of the most difficult tasks for the Wyckoff operator: to know how to distinguish between a redistribution range and an accumulation range.
During the periods of redistribution, the great professional who is already short returns to sell around the top of the range and potentially cover (close/buy) some of his positions near the base of the range.
In general, they are increasing the size of their short position during range development. The reason they close some of their short positions at the base of the range is to provide price support and not to push it down prematurely before they can establish a significant short position.
Redistribution remains volatile during and at the end of its development before continuing the downtrend.
The hands that control the value will change during the course of the trend. At the beginning of a bearish trend, the value is under the control of very strong owners (professional traders, strong hands), but as it develops, the stock will gradually change towards less informed operators, weak hands. At this point, it is said that the supply 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.
Length of structure
The percentage of strong and weak hands that have control of the value will influence the duration of the structure. If at the beginning of the redistribution 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 sales process.
The objectives of the main distribution will not yet be met and this structure is being developed to add new selling positions to the market with which to continue the downward movement towards these objectives.
Recommended Post: The accumulation process in the financial markets