Ask Colin

I’m thinking the recognition of Accumulation and Distribution phases must be called after the fact?

Basically, we are looking for a chart that fits the value model. If there is a long downtrend and then a big sideways pattern, it is a candidate for an accumulation area. However, we cannot be certain, and I am not interested in it, until there is an upward breakout. Then the odds are good that it is a completed accumulation pattern. Nevertheless, some of them will fail, so we need to see follow through on the breakout and the development of an uptrend. If that does not happen, it is why we have a sell-stop.

Distribution is really the reverse. If we have a value model chart with a long uptrend and a broad trading range develops, it is a candidate for a distribution pattern. Again, the key is the downward breakout and follow through on the breakout.

In both cases it is not so much a question of hindsight (after the event), but of not jumping the gun until the pattern is completed with a breakout. This is because there are enough situations where it can take many months or even years for a pattern to be completed. More importantly, some fail and we see an additional phase of the prior trend, which means the initial presumption was incorrect.

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