THE HAnDbook oF TECHnICAl AnAlysIsavailable. It is at this point that the informed or smart market participants start ac-
cumulating shares at extremely advantageous prices, in anticipation of a more bullish
environment. This contrarian approach by the informed participants helps create a
final and decisive bottom in the market, with very large responsive buying by the
smart investors during the last stages of the preceding downtrend (in the form of a
sell‐off or “selling climax”) and into the nascent stages of a more prolonged accu-
mulation phase. Smart investors continue to gather shares in a very gradual manner
during the accumulation process, careful not to drive up prices too fast so that they
may continue to take advantage of the low prices. Smart investors normally have
deep pockets in order to engage in such contrarian‐based participation. The accumu-
lation phase normally lasts relatively longer than the distribution phase. This is due
to the lower amount of capital at risk at lower prices, at the bottom of the market.
trend phase The uptrend phase is normally fueled by traders and investors ex-
pecting either higher prices after an accumulation or lower prices after a distribution.
Technical traders tend to get in much earlier, especially during a clear technical up-
side breakout from a consolidation, followed by the more market savvy investors.
Media and news headlines also tend to be more upbeat at the early stages of an
uptrend. As the uptrend progresses and starts to become more obvious, the general
public begins to become aware and attracted to the rising prices. Previously bearish
participants are also beginning to cover their short positions. With increasingly bull-
ish fundamental data released or reported by companies, public participation begins
to increase rapidly. Regret bias is felt by increasingly more participants as prices rise
higher, inviting those who miss out on the earlier prices to buy at every dip on the
way up. Participants who sold off positions too early are also now regretting their
decision and are similarly trying to get back in at any opportunity. At even higher
prices, the mass of public participation, that is, the herd, starts to use more margin,
to the extent of even borrowing funds in order to invest in the rapidly rising market.
The markets continue to spiral to new heights in a vicious positive feedback cycle.
The uptrend phase tends to be more prolonged than the downtrend phase, due to
the lower amounts of capital at risk, at the lower, more affordable prices.
The downtrend phase begins with a breakdown in prices from a distribu-
tion range, with increasingly bearish fundamental data reported by companies.
As prices descend, the uninformed traders and investors begin to unload some
positions. Previously bullish participants begin to liquidate their shares. Further
unexpected declines in prices start to attract even more public attention, caus-
ing larger liquidation. As the threshold of pain and allowable margin limits is
surpassed, this triggers an outflow of capital from the markets. Bearish sentiment
continues to intensify as prices sink to new depths. The markets continue to plum-
met in a vicious positive feedback cycle. The downtrend phase tends to be shorter
lived than the uptrend phase, due to the larger amounts of capital (and unrealized
profit) at risk, at the higher more expensive prices.
Distribution phase Distribution normally occurs after a strong and rapid rise
in prices. Companies tend to outperform with the release of very positive data,
accompanied by the most bullish media headlines and news. The unsophisticated