Distribution Schematics

Phase A
In Phase A, demand has been dominant and the first significant evidence of demand becoming exhausted comes at point 1 at Preliminary Supply (PSY) and at point 2 at the Buying Climax (BC). (See the chart above.) It often occurs on wide spread and climatic volume. This is usually followed by an Automatic Reaction (AR) and then a Secondary Test (ST) of the BC, usually on diminished volume. This is essentially the inverse of Phase A in accumulation. As with accumulation, Phase A in distribution may also end without climactic action and the only evidence of exhaustion of demand is
diminishing spread and volume. Where Redistribution is concerned (a TR within a larger continuing downmove), we will see the stopping of a downmove with or without climactic action in Phase A. However, in the remainder of the TR the guiding principles and analysis within Phases B through E will be the same as within a TR of a Distribution market top.

Phase B
The points to be made here about Phase B are the same as those made for Phase B within Accumulation, except clues may begin to surface here of the supply/demand balance moving toward supply instead of demand.

Phase C
One of the ways Phase C reveals itself after the standoff in Phase B is by the “sign of weakness” (SOW) shown at point 10 on Schematic 3. This SOW is usually accompanied by significantly increased spread and volume to the downside that seems to break the standoff in Phase B. The SOW may or may not “fall through the ice,” but the subsequent rally back to point 11, a “last point of supply” (LPSY) is usually unconvincing and is likely to be accompanied by less spread and/or volume. Point 11 on both distribution Schematics 3 give us our last opportunity to cover any remaining longs and our first inviting opportunity to take a short position. An even better place would be on the rally testing point 11, because it may give us more evidence (diminished spread and volume) and/or a more tightly defined danger point. An upthrust is the opposite of a spring. It is a price move above the resistance level of a trading range that quickly reverses itself and moves back into the trading range. An upthrust is a “bull trap” – it appears to signal a start of an uptrend but in reality marks the end of the up move. The magnitude of the upthrust can be determined by the extent of the price move to new highs and the relative level of volume on that movement. Looking now at Schematic 3, Phase C may also reveal itself by a pronounced move upward, breaking through the highs of the TR. This is shown at point 11 as an “Upthrust After Distribution” (UTAD). Like the terminal shakeout discussed earlier in the accumulation schematic, this gives a false impression of the direction of the market and allows further distribution at high prices to new buyers. It also results in weak holders of short positions surrendering their positions to stronger players just before the down move begins. Should the move to new high ground be on increasing volume and “relative narrowing spread” and then return to the average level of closes of the TR, this would indicate lack of solid demand and confirm that the breakout to the upside did not indicate a TR of accumulation, but rather a formation of distribution. A third variation not shown here in schematic form would be an upthrust above the highs of the trading range with a quick fall back into the middle of the TR, but where the TR did not fully represent distribution. In this case, the TR would likely be too wide to fully represent distribution and there would be a lack of concentrated selling except in the latter portions of the TR.

Phase D
Phase D arrives and reveals itself after the tests in phase C show us the last gasps or the last hurrah of demand. In Phase D, the evidence of supply becoming dominant increases either with a break through the “ice” or with a further SOW into the TR after an upthrust. In phase D, we are also given more evidence of the probable direction of the market and the opportunity to take our first or additional short positions. Our best opportunities are at points 13, 15, and 17 as represented on our Schematics 2 and 3. These rallies represent “Last points of Supply” (LPSY) before a markdown cycle begins. Our “averaging in” of the set of positions taken within Phases C and D as described above represent a calculated approach to protect capital and maximize profit. It is important that additional short positions be added or pyramided only if our initial positions are in profit.

Phase E
In Phase E, the stock or commodity leaves the TR and supply is in control. Rallies are usually feeble. Having taken our positions, we must monitor the stock’s progress as it works out its force of distribution. Successful understanding and analysis of a trading range enables traders to identify special trading opportunities with potentially very favourable reward/risk parameters. When analysing a TR, we are first seeking to uncover what the law of supply and demand is revealing to us. However, when individual movements, rallies or reactions are not revealing with respect to supply and demand, it is important to remember the law of “effort versus result”. By comparing rallies and reactions within the trading range to each other in terms of spread, volume, velocity and price, additional clues may be given as to the stock’s strength, position and probable course. It will also be useful to employ the law of “cause and effect”. Within the dynamics of a TR, the force of accumulation or distribution gives us the cause and the potential opportunity for substantial trading profits. It will also give us the ability, with the use of point and figure charts, to project the extent of the eventual move out of the TR and help us to determine if those trading opportunities favorably meet or exceed our reward/risk parameters.