THE HAnDbook oF TECHnICAl AnAlysIsAccording to Dow Theory, a primary trend typically spans from months to
years in the equity markets. Due to the high leverage that is afforded traders in
the futures markets, primary trends in the commodity futures markets tend to
span relatively shorter durations. High leverage tends to induce greater volatil-
ity in the markets. This is an important point to bear in mind when attempting
to gauge the average duration and extent of market phase behavior in such
markets. Although Dow Theory’s original description of market phase relates
primarily to the equity markets, the existence of these phases is found across all
markets.
In essence, there are only two basic phases, that is, the consolidation phase
and the trending phase. The consolidation phase may be further subdivided into
the accumulation and distribution phases. See Figure 4.1.
Whether consolidation represents accumulation or distribution is only as-
certained after the fact. That is, if the market rises after consolidating, we say
that the consolidation represents accumulation (buying activity). Conversely, if
the market declines after consolidating, we say that the consolidation represents
distribution (selling activity). One of the objectives of technical analysis is to try
to look for evidence to suggest whether accumulation or distribution is taking
place during a consolidation. For example, it is observed that volume normally
declines gradually during a consolidation. Very low levels of volume are usually
a strong prognostication that the consolidation may potentially be coming to an
end with a subsequent transition to a trend up or trend down phase. On a daily
chart, consolidations normally lasts about three to six months, sometimes longer.
See Figure 4.2.
These phases are also evident on the lower, sub‐hourly timeframes. In
Figure 4.3, we see micro phase action on the 15‐min EURUSD chart.
Market phase sentiment and participatory behavior
The psychological and participatory aspects associated with each market phase
are briefly described as follows.
figure 4.1 Components of Market Phase.