ACCUMULATION, DISTRIBUTION, CONSOLIDATION

By Daryl Guppy

Classic market analysis talks of accumulation and distribution phases. The accumulation phase is when buyers enter the market. They accumulate a falling stock because they believe the trend will soon change. Accumulation shows early buying in the market as they acquire shares from shareholders who have lost faith in the company. Distribution occurs when these early buyers decide to sell the shares they have accumulated. As the price rises, they offer their shares for sale. As more and more shares are offered, it becomes more difficult for the price to continue rising. This distribution phase shows the end of the uptrend. Distribution  and accumulation are associated with long term chart patterns. The distribution patterns are the head and shoulder pattern and the rounding top. The accumulation patterns are a rounding bottom, or an inverted head and shoulder pattern, sometimes called a “W” pattern. We find the rounding bottom the most reliable of the accumulation patterns.

Each of these patterns is associated with a consolidation area. Consolidation occurs when a downtrend slows. Prices cluster, or hover, near a particular price level. Price stops falling. The consolidation period is usually a narrow trading band. Prices has small rallies and small retreats. The trend is sideways. Consolidation in a downtrend is a signal that accumulation is developed. In an uptrend, consolidation also develops as a narrow trading band. This is not called consolidation, but is has the same features. The price activity stops trending upwards and moves sideways. This is a signal that distribution is developing.