Evening Traders,
In Today’s Analysis I am going to focus on the Wyckoff Distribution theory on Bitcoin's current Price Action, the similarities are striking and I do believe we are in Phase D, approaching Phase E.
Firstly I’ll list the acronyms for your reference:
- PSY (Preliminary Supply) – First bull impulses in the range
- BC (Buying Climax) – Volume Climax
- AR (Automatic Reaction) – Strong buy pressure
- ST (Secondary Test) – Bearish Retest of Structure
- SOW (Show of Weakness) – Bearish Price Action
- LPSY (Last Point of Supply) – Consecutive lower highs
- UTAD (Upthrust after distribution) – Usually a Bull Trap/ Liquidity Grab
There are 3 LAW's to adhere to in Wyckoff’s Theory;
1. The law of Supply and Demand
2. The law of Cause and Affect
3. The law of Effort
The Law of Supply and Demand;
- When Demand is greater than Supply, price increases, this is evident in Phase A of Bitcoin's Price Action.
- When Supply is greater than Demand, price falls, Phase D reflects this in Bitcoin’s current Market Structure.
The Law of Cause and Affect;
- Creates clear price boundaries that set objectives, these are essentially the Support and Resistance levels of the Trading Range. Evident in Bitcoin, (Blue Support and Resistance lines), price bounces between these pivots as
distribution occurs.
The Law of Effort
- Used to indicate momentum shifts,( institutions offloading their holdings), price tends to be weak with consecutive lower highs as supply takes over, (Phase D and E).
- Divergences between Volume and Price coincide with the market direction as a whole, evident in Bitcoin as volume continues to decline in Phase D.
Moving on to the technical aspect keeping these laws in mind will better help understand the chart.
Phase A:
- PSY (Preliminary Supply) – First bull impulses in the range expand on Bitcoin and Price Action widens, this is an early indication of momentum shifting from the Parabola.
- BC (Buying Climax) – Essentially a volume climax in Phase A that marks the temporary top of the uptrend.
- SC (Secondary Test) – Bearish Retest of the structure, Bitcoin makes an attempt to take out recent highs but fails and rolls over into the next Phase.
Phase B:
- UT (Up-Thrust) – A swing high failure, the price of Bitcoin fails to establish a high and does not close above resistance.
- SOW (Show of weakness) – Bearish Price Action, Bitcoin’s price essentially starts to show weakness as the law of cause and affect takes over. Sign that Supply is starting to take over the market.
Phase C:
- UTAD (Uptrend after Distribution) – Essentially a liquidity grab/ bull trap which takes place at a key level in phase C. Bitcoin establishes this by failing to close above $10,428, trapping long buyers before an impulse down.
Phase D:
- LPSY (Last Points of Supply) – Consecutive lower highs is the characteristics in this Phase. Bitcoin’s Price Action fails to rally as Supply starts to overweight Demand. Buyer Exhaustion is evident here as price starts to roll over into Phase E.
Phase E:
- Price is in control by Supply and continues with consecutive lower highs. Show of weakness is great in this phase; taking out the lower boundary of distribution usually proceeds with a significant bear rally. If Bitcoin holds current projection (lower highs), a test of the lower boundary will be the pivot point – Completion of the Wyckoff study.
This theory helps understand the distribution and accumulation process of the market as whole, certain objectives have to be met in order to validate the study. Bitcoins market structure has been in synch with the theory thus far, if weakness continues to show in phase D and E, the probability of taking out the lower boundary will increase.
An important takeaway from this theory is to understand the relationship between Demand and Supply. The dynamics between Demand and Supply is what moves the overall market, usually in accordance to the objectives of larger institutions (Smart Money). The Wyckoff’s theory helps largely in identifying these shifts in momentum where retail investors can position themselves in accordance to smart money.
Hope you learnt something new in this analysis!
Thank you for following my work
And remember,
“The Tape Reader’s profits should develop naturally. He should buy or sell because it is the thing to do – not because he wants to make a profit or fears to make a loss” ― Richard D. Wyckoff
In Today’s Analysis I am going to focus on the Wyckoff Distribution theory on Bitcoin's current Price Action, the similarities are striking and I do believe we are in Phase D, approaching Phase E.
Firstly I’ll list the acronyms for your reference:
- PSY (Preliminary Supply) – First bull impulses in the range
- BC (Buying Climax) – Volume Climax
- AR (Automatic Reaction) – Strong buy pressure
- ST (Secondary Test) – Bearish Retest of Structure
- SOW (Show of Weakness) – Bearish Price Action
- LPSY (Last Point of Supply) – Consecutive lower highs
- UTAD (Upthrust after distribution) – Usually a Bull Trap/ Liquidity Grab
There are 3 LAW's to adhere to in Wyckoff’s Theory;
1. The law of Supply and Demand
2. The law of Cause and Affect
3. The law of Effort
The Law of Supply and Demand;
- When Demand is greater than Supply, price increases, this is evident in Phase A of Bitcoin's Price Action.
- When Supply is greater than Demand, price falls, Phase D reflects this in Bitcoin’s current Market Structure.
The Law of Cause and Affect;
- Creates clear price boundaries that set objectives, these are essentially the Support and Resistance levels of the Trading Range. Evident in Bitcoin, (Blue Support and Resistance lines), price bounces between these pivots as
distribution occurs.
The Law of Effort
- Used to indicate momentum shifts,( institutions offloading their holdings), price tends to be weak with consecutive lower highs as supply takes over, (Phase D and E).
- Divergences between Volume and Price coincide with the market direction as a whole, evident in Bitcoin as volume continues to decline in Phase D.
Moving on to the technical aspect keeping these laws in mind will better help understand the chart.
Phase A:
- PSY (Preliminary Supply) – First bull impulses in the range expand on Bitcoin and Price Action widens, this is an early indication of momentum shifting from the Parabola.
- BC (Buying Climax) – Essentially a volume climax in Phase A that marks the temporary top of the uptrend.
- SC (Secondary Test) – Bearish Retest of the structure, Bitcoin makes an attempt to take out recent highs but fails and rolls over into the next Phase.
Phase B:
- UT (Up-Thrust) – A swing high failure, the price of Bitcoin fails to establish a high and does not close above resistance.
- SOW (Show of weakness) – Bearish Price Action, Bitcoin’s price essentially starts to show weakness as the law of cause and affect takes over. Sign that Supply is starting to take over the market.
Phase C:
- UTAD (Uptrend after Distribution) – Essentially a liquidity grab/ bull trap which takes place at a key level in phase C. Bitcoin establishes this by failing to close above $10,428, trapping long buyers before an impulse down.
Phase D:
- LPSY (Last Points of Supply) – Consecutive lower highs is the characteristics in this Phase. Bitcoin’s Price Action fails to rally as Supply starts to overweight Demand. Buyer Exhaustion is evident here as price starts to roll over into Phase E.
Phase E:
- Price is in control by Supply and continues with consecutive lower highs. Show of weakness is great in this phase; taking out the lower boundary of distribution usually proceeds with a significant bear rally. If Bitcoin holds current projection (lower highs), a test of the lower boundary will be the pivot point – Completion of the Wyckoff study.
This theory helps understand the distribution and accumulation process of the market as whole, certain objectives have to be met in order to validate the study. Bitcoins market structure has been in synch with the theory thus far, if weakness continues to show in phase D and E, the probability of taking out the lower boundary will increase.
An important takeaway from this theory is to understand the relationship between Demand and Supply. The dynamics between Demand and Supply is what moves the overall market, usually in accordance to the objectives of larger institutions (Smart Money). The Wyckoff’s theory helps largely in identifying these shifts in momentum where retail investors can position themselves in accordance to smart money.
Hope you learnt something new in this analysis!
Thank you for following my work
And remember,
“The Tape Reader’s profits should develop naturally. He should buy or sell because it is the thing to do – not because he wants to make a profit or fears to make a loss” ― Richard D. Wyckoff