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Trading Experience: None

Trading ranges are important for the opportunities they provide to establish positions. When an investor takes advantage of an uptrend or a down trend, he is in effect jumping aboard a moving train. Providing he does not fall off, he is guaranteed a ride and knows in which direction that ride will be. However, since the train is already moving, he has missed some of the journey. Perhaps he has missed a major portion of it. By taking advantage of the trading opportunities within the trading range, there is the chance to get on board while the train is still at the station and participate in the entire move.

First, it is necessary to establish the definition of the horizontal trend. A trading range may develop at the end of an up move or the end of a down move. In either case, it represents the preparation for the next move. If that is on the upside, the trading range is said to represent accumulation. If the next move is down, the trading range is said to be distribution. Accumulation precedes an up move and distribution precedes a down move.

Defining a trading range requires two points to construct the trend channel and a third point to confirm the trend. The nature of the two points involved in setting up the trend channel depends on the type of trend that comes before it.

Note that as the stock approaches its low at point there is an acceleration in the rate of decline and the development of an oversold condition. The development of an oversold condition is not essential. The other observation, that of the rate of decline accelerating is essential. It is this action that helps stop the decline.

The bottom of the trading range is the support line or the support level. It becomes evident by drawing a horizontal line through the low point of the decline. The top of the trading range is the resistance line or resistance level. It is constructed parallel to the support level through a point at the top of the rally immediately following the point used to define the support level. These two points result in the lines that define the horizontal trend channel, but at this point the trend is still only a potential. What is needed is one more move; in this case, a reaction back down to or toward the support level, If the support holds, the trend is confirmed.

In the case a stock is in an uptrend making good upside progress as it advances toward point where the move climaxes in an overbought condition. The overbought position is included only for the sake of clarity. The rapid increase is a much more essential element. This is where to begin defining the trading range. In this case, the resistance level is defined first. It is constructed horizontally through the point at the top of the move. The second step is the defining of the support level. This is constructed parallel to the resistance level through a point at the bottom of the reaction following the point used to define the resistance level. This potential trading range is confirmed when the stock rallies up to or toward the resistance level and respects it.

As long as the market, or a stock, remains in a trading range, a major advance or decline will not happen. The critical points for most investing occur when the boundaries of the trading range are violated. These are the signals that moves are either beginning or are about to begin. The action that these signals foreshadow is not what many people expect. For example, a new high does not necessarily mean the beginning of an important advance, and a new low is not to be taken as an automatic signal of a major decline. In both cases they often mean the exact opposite. Additional time will be spent considering these critical points later. For now, keep in mind that when somebody says that this or that is going to happen because a new high or low is recorded, chances are that person really does not know what he is talking about. The best course of action is not to pay any attention. If he is right there will be more important evidence available.

On your chart you mark a "shakeout" and label the lower level as ice. With a shakeout you are expecting the trend to continue, correct? How do you tell if it's a shakeout and not a move down that will continue?

Accumulation Schematic

Phases A through E: Phases through which the Trading Range passes as conceptualised by the Wyckoff method and explained in the text.
Lines A and B… define support of the Trading Range.
Lines C and D… define resistance of the Trading Range.

(PS) preliminary Support is where substantial buying begins to provided pronounced support after a prolonged downmove Volume and spread widen and provide a signal that the downmove may be approaching its end.

(SC) Selling Climax… the point at which widening spread and selling pressure usually climaxes and heavy or panicky selling by the public is being absorbed by larger professional interests at prices near a bottom.

(AR) Automatic Rally… selling pressure has been pretty much exhausted. A wave of buying can now easily push up prices which is further fuelled by short covering. The high of this rally will help define the top of the trading range.

(STs) Secondary Test(s)… revisit the area of the Selling Climax to test the supply demand balance at these price levels. If a bottom is to be confirmed, significant supply should not resurface, and volume and price spread should be significantly diminished as the market approaches support in the area of the SC.

The "CREEK" is an analogy to a wavy line of resistance drawn loosely across rally peaks within the trading range. There are of course minor lines of resistance and more significant ones that will have to be crossed before the market's journey can continue onward and upward.

Springs or Shakeouts usually occur late within the trading range and allow the market and its dominant players to make a definitive test of available supply before a markup campaign will unfold. If the amount of supply that surfaces on a break of support is very light (low volume), it will be an indication that the way is clear for a sustained advance. Heavy supply here will usually mean a renewed decline. Moderate volume here may mean more testing of support and to proceed with caution. The spring or shakeout also serves the purpose of providing dominant interests with additional supply from weak holders at low prices.

Jump Across the Creek (JAC) is a continuation of the creek analogy of jumping resistance and is a good sign if done on good spread and volume - a sign of strength (SOS).

Sign of Strength (SOS)… an advance on good (increasing) spread and volume.

Back Up (BU) to a Last Point of Support (LPS) - a pull back to support (that was resistance) on diminished spread and volume after a SOS.

This is good place to initiate long positions or to add to profitable ones.

Note: A series of SOS's and LPS's is good evidence that a bottom is in place and Price Markup has begun.