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Module 5: Lesson 11

The Phase of Excess

The Re-Distribution / Re-Accumulation phase is the longest of the three market phases, and at the end of it, the Trend often accelerates even more. During the surplus period, the market is prone to euphoria and irrational optimism, which can lead to “bubble”- like behavior. At this point, the last of the uninformed buyers enter the market, unaware that the end is approaching.

The ‘smart money’ guys begin to relax their positions during the surplus phase because such markets are vulnerable and can become hectic and extremely volatile. A trader should be aware of this phase’s warning signs, including significant downward pressure, increased volatility, deeper pullbacks, and the loss of power of upward trend waves.

Phase of Distribution

The origin and initial phase of a bear market is the distribution phase. Having settled their long positions during the excess phase, informed traders will now enter the distribution phase with new short positions.

The market is often overbought at this point, but uninformed traders believe that more bullish pressure is on the way.

Traders who do not understand market phases should be aware that they are not only picking a top during a bull market but also an unclear consolidation during a bull market for a distribution phase, which can be a costly mistake. Long-term concentrations, decreasing purchase attempts, head and shoulders patterns, new outbreaks from long distances, and signs that the price is making lower lows and lower peaks are all signals that the trader should look for.

Optional Assignment

Submit two charts with clearly drawn Market Phases as a homework assignment.