Watch out for the raging bull…
I have spoken at length time and time again about Wyckoff and how to identify the start of a trend.
But today, I just wanted to explain how a bull market actually starts from the perspective of institutional traders.
This is not so much an intraday description, but more long-term.
Stirring the bull
To start the bull market process, an asset starts to fall in price day after day, week after week, punctuated with small up-moves with lower tops, as seen in a bear market.
At some point there will be a level reached where weak holders will start to panic (known as ‘the herd’) and will tend to sell their stock holdings all at the same time.
These weak holders will not be able to stand any more losses, and will be fearful of even further losses (the news will be bad).
As these traders sell, professional money will step in and start buying, because in their view, the stock can now be sold at a higher price at some point in the future.
The panic selling has also given professional money the opportunity to buy without putting the price up against their own buying (accumulation).
This process is going on all the time, creating either a small move or a large move. Any move that does start, is in direct proportion to the amount of shares which have changed hands.
To create a major bull market, you need to see the extremes of this process at work, which is known as a selling climax.
This phenomenon occurs when there is a major transfer of stock from weak holders. Weak holders are traders who have been locked-in at higher prices, suffering the fear and pressure of losses, which cannot be tolerated any longer.
These weak holders gladly sell to the strong holders.
This then gives the strong holders, who are on the right side of the market, the opportunity to buy and to cover their short positions without putting the price up against their own buying.
Accumulation is the term used to show that large interests are actively buying stock.
The traders in most accumulation campaigns are usually not interested in the company or its directors.
They will have already done all their homework on the targeted company.
Their only interest is in making a profit from a price difference.
Grabbing it by the horns
A very good way to absorb a large capital base is to target a fundamentally good quality company stock that has seen a substantial drop in price.
Buying takes place, but the trick is to keep your buying as quiet as possible and never allow your buying to raise the price of the stock very far. These buy orders will vary under different market conditions.
As time passes, larger and larger amounts of stock are transferred to the buyers (strong holders).
As this transfer takes place, the imbalance of the supply and demand becomes greater. Once the buyers have removed the restraints, a bull move will occur.
Many professionals operate in so-called ‘rings’ for group strength. Huge amounts of money are invested in the accumulation (buying) of targeted stocks by large concerns, and even individual traders acting for their own, or unknown accounts.
Many outside traders may have noticed the buying and will now start buying on the principle “if it is good enough for them, it is good enough for me“. This secondary buying is liable to create resistance at higher prices, as these outsiders take profits before the bull market has had time to run its full course.