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Lesson 29

11. Phases of the Market

The market moves through three stages: distribution, re-distribution or re-accumulation, and accumulation.

As you can see in this example, the market moves in a 3 phase pattern when it is trending – the market is divided into three phases on both lower and higher time frames.

In a very strong trend, the market pulls back after the third phase to form three more phases, rising higher and higher in an uptrend and falling lower in a downtrend.

The Phase of Accumulation

The accumulation phase of a bull market begins when informed investors (experienced traders and institutions) typically enter their positions. During the accumulation phase, price movements are slow. Ordinary investors believe that more bearish movement is on the horizon, and the outlook is generally pessimistic when the accumulation phase occurs at the end of a downward trend.

However, if the price is low, it may be a good idea for smart money to enter such a market. At the same time, this does not imply that a trader must attempt to pick a bottom during a bear market; doing so makes the accumulation phase challenging to manage. A trader should pay attention to more extended periods of consolidation during the late stages of a bear market, a shift in how swing highs and lows manifest themselves in the charts, which is another vital issue of the Dow Theory.

On momentum indicators, broken consolidation channels that indicate breakouts, (reverse) head and shoulders patterns, and other transition modes, technical plays, and patterns during an accumulation phase may differ.

Phase of re-accumulation and Phase of Re-distribution

The phase of Re-Accumulation begins when the price exits the accumulation phase, and the new Trend becomes visible. As a result, an increasing number of investors are following the Trend and ensuring higher prices. The Re-accumulation phase is usually accompanied by actual economic data.

More investors enter the market as a trend continues, and this is also when “trend – following” or “momentum” traders receive signals from their trading systems to enter.