In Wyckoff analysis, the two most crucial indicators are price and volume. While we may choose to apply others, these two should serve as our primary points of study.
The problem with identifying accumulation or distribution is distinguishing the difference between a random trading range and actual accumulation or distribution. One subtle sign Wyckoff analysts use are springs and upthrusts.
The Wyckoff Spring and Upthrust
Springs and upthrusts are the keys to distinguishing between a zone of accumulation/distribution and a random trading range. They occur when price momentarily trades outside of the range, only to be aggressively bought or sold back into the range.
In more modern jargon, you’ll hear a Wyckoff spring referred to as a failure test. The market is testing a break below the bottom of the range and is quickly rejected, indicating strong support.
Here’s an example from the S&P 500 in November 2008, a time when smart money actually was aggressively accumulating significant positions.
An upthrust is the same as a spring, except reversed. Instead of a failure test of the bottom range, it’s at the top range. In the same way that a spring may indicate a trend reversal to the upside, an upthrust may indicate a trend reversal to the downside.
Here’s an example of a successful upthrust and a failed spring pattern from Adam Grimes’ website:
Reversals: Large-Cap vs. Low-Float Microcaps
Low-float momentum stocks do move differently than their large-cap counterparts, though. It’s not uncommon to see a parabolic run-up soon followed by a congruent sell-off. Let’s be honest; most runners that low-float day traders play are basically pump and dumps.
There isn’t usually an underlying fundamental change in value driving the rallies, rather a strategically timed press release or promotion coinciding with the announcement of a capital raise or the conversion of a note into equity.
This isn’t always the case, of course, but you should be inherently skeptical of parabolic runs in microcaps.
Here’s a dramatic look at how compressed the trend reversals within a low-float stock can be. The trend both climaxed and wholly reversed in a week’s time.
In contrast, here’s a more typical example of a trend reversal. Observe how it took Apple about two months from the time of its trend climax, to the actual breakdown of distribution.
Graphs like the HMNY example above show how rampant speculation, manipulation, and FOMO are in the low-float market, as compared to the much more tame market of large-caps.