The Wyckoff Accumulation and Distribution Schematics

 Accumulation occurs after a prolonged downtrend, which is also known as the Mark down phase. The accumulation and the distribution phases are range bound trading periods where there is no clear direction of price movement. The distribution phase occurs after an uptrend which is also known as the Mark up phase.

You may find this article helpful: Price action analysis using the Wyckoff method

Accumulation Schematic

There are five phases to the Wyckoff accumulation schematic.

Phase A 

Phase A starts with price moving in a downtrend and volume steadily increasing. Buyers begin to enter the market  and are trying to change the direction of the market resulting in preliminary support. However, the buying power is not enough to stop the downward movement of price till it reaches a selling climax.

A selling climax is a sharp decrease in the prices of stocks or derivatives for a very short period of time alongside increased volume. At this stage, price has been oversold and some traders who entered their positions higher begin to close their positions. The selling climax is followed by a rally. 

The automatic rally is the first indicator of a trend reversal. There are more buyers entering the market hence causing price to move higher, however, there are still some sellers in the market trying to push the price further down resulting in a secondary test.

A secondary test occurs when the price drops near the selling climax region to test whether the market is still in a downtrend. At this point the trading volume is low. 

Phase B

This is the consolidation phase where the market tests both the resistance and the support levels. In this phase, the law of cause and effect comes into play, meaning that the length of the consolidation determines the extent of the emerging trend. There may be numerous secondary tests forming around the selling climax and the automatic rally of phase A.

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Phase C

A spring occurs when price falls below the support level and then quickly moves back into its trading range. They occur late in the trading range to test available supply before markup. The law of supply and demand comes into play. After the market responds to the spring with a rally, there is likely to be a test of the spring.  The test provides a second opportunity for supply to cause price to fall. If supply successfully begins a decline in price then the test has failed. However, the test is successful when supply does not take control of the action.  Some traders start to enter into buying positions on the spring level and some enter on the test of the spring.

Phase D

The last point of support is formed and the uptrend starts gaining strength as more buyers begin to participate in the market. 

Phase E

This is when price breaks the resistance level and there is a clear uptrend. This is also known as the Mark up phase as described in the article on Price action analysis using the Wyckoff method. These phases are clearly illustrated in the EURGBP daily chart shown below.

Distribution Schematic

The distribution phase is the exact opposite of the accumulation phase. It occurs during price consolidation at the end of an uptrend. 

Phase A

Phase A starts with price moving in an uptrend and volume steadily increasing. The buying climax is a sharp increase in volume and price. The buying climax is followed by an automatic rally which is the first signal of a trend reversal. 

Phase B

In this phase, the market will be testing both the resistance and the support levels.

Phase C

In phase C, there is an upthrust which is a test of demand after a breakout above resistance level. An upthrust is a distributional counterpart to the spring in Phase C of the accumulation trading range.  

Phase D

The last point of supply is formed and the downtrend starts gaining strength as more sellers start to participate in the market. 

Phase E

Price breaks the support level and there is a clear downward movement of price. This marks the beginning of the Markdown phase.

Summary

Accumulation and distribution schematics may be clear on a sketch diagram, however, make sure that you check the following when you are analysing your charts:

1. Trading volume
2. A clear selling climax (for accumulation) or buying climax (for distribution)
3. Automatic rally, the first indicator of a trend reversal
4. Springs (for accumulation) or upthrusts (for distribution) and their movements around the trading ranges.