How to Identify Market Movement

In order to be successful as a trader it is often important to understand the way the market moves.

One of the best models for understanding  market movement is the Wyckoff  Market Analysis.

Richard Wyckoff was a trader in the early 1900's and found there were 4 stages that a market moved through.

1. Accumulation
2. Markup/Uptrend
3. Distribution
4. Markdown/Uptrend



Figure 1  Wyckoff Market Stages

 Accumulation

Accumulation comes at the bottom of downtrend.  This is usually when fear is the highest and regular investors are dumping their shares, but the "smart money" institutional investors are realizing that this is where the bargains are.  So the market goes up and down while investors continue to sell shares and institutions continue to buy.

Markup/Uptrend

The next phase is the markup or the uptrend.  This phase of the cycle is when investors begin to realize that larger influences in the market are moving it higher.  Those investors that were on the sidelines see that the market is being pushed higher by smart money jump in and this creates demand and pushes the market higher.  The breakout of accumulation is when a new high is made.

Distribution

As the market begins to top it begins to enter the distribution phase this is usually marked by churning.  This means that now the smart investors are beginning to get out of there shares and sell them to those investors who are late to the party and for awhile the price can go up and down and up and down. The market gets caught going sideways and can tilt lower.

Markdown/Downtrend

This is the sell off stage where there begins to be fear and panic and investors along with "smart money" are unloading on the market.  This is where the market moves down like and elevator and can happen rapidly.

The S&P 500 recently went through this cycle



This cycle is often repeated in sectors and in individual stocks.  In fact a process in finding a stock comes when you determine the market direction, sector direction (I use the sector SPDR ETF's), and the stock within in the sector.

If the market is moving up I choose a sector that is moving up, if the market is moving down, I choose a sector that is moving down and then choose weak stocks in that sector moving in the same direction.

By assessing the market movement in this way it can be easy to find sectors or stock moving in a similar direction.  Its best to stay neutral or in cash during accumulation or distribution.  When a markup/uptrend begins you can go long and look for opportunities where stocks can pop.  When a markdown/downtrend begins you can look at short opportunities.

See how nice and easy this is so far for the next lesson click on Why You Should Trade Trends