Chapter Five

Volume Price Analysis: Building The Picture

Mistakes are the best teachers. One does not learn from success.
Mohnish Pabrai ( 1964 -)

In the previous chapter we looked at some of the basic building blocks of

VPA, and how to apply our analysis first to single candles, and then to use
this knowledge in relation to small groups of candles. This really took us
through the first two steps of VPA in our three step process. The three step
process which begins with a close up look at one candle, then gradually
zooms out, to step 2 which is the candles in close proximity to the latest
candle. Finally, we zoom out to bring the complete chart into focus, which is
what we are going to focus on in this chapter, and in doing so, I hope will
also help to reinforce the basic skills we learnt in the previous chapter.
In addition in this chapter, I'm also going to introduce some new concepts
which I hope will help to put everything into context, and pull the various
strands of VPA together. I think this is probably the best place to start, and
then we can begin to look at a variety of examples, and I can walk you
through each chart as the price action unfolds.
So let me start with five concepts which lie at the heart of VPA, and these are
as follows:

1. Accumulation
2. Distribution
3. Testing
4. Selling Climax
5. Buying Climax

The simplest way to understand these terms, and for me to explain them to
you, is to go back to our analogy of the warehouse, which was also used by
Richard Ney in his books to explain this concept. This is what he said:
“To understand the specialists' practices, the investor must learn to think of
specialists as merchants who want to sell an inventory of stock at retail price
levels. When they clear their shelves of their inventory they will seek to
employ their profits to buy more merchandise at wholesale price levels.”

I used the same analogy in my article for Working Money magazine many
years later, which was the Parable of Uncle Joe.
The easiest way to think of volume in terms of the market price action, and
this applies to all markets, is to use the wholesaling analogy. However, in
order to keep things simple, let's just refer to the specialists, the market
makers, the large operators, the professional money, as the insiders from now
on. So, the insiders are the merchants who own the warehouses of stock and
their primary goal is to make money buy buying at wholesale prices and then
selling at retail prices.
Remember also, in the following explanations, that in my VPA Principle No
2, the market always takes time to turn in a dramatic way, and this is also
borne out in Wyckoff's second law of cause and effect. We are always going
to see small changes up and down, as the market pulls back or reverses in a
longer term trend. But, for the major changes in trend to occur, (and
remember, a 'major change' can appear on a 5 minute chart or a 1 day chart)
this takes time. The longer the time taken, (the cause), the greater the change
(the effect). However, this does vary from market to market. Some markets
may take days, weeks or even months, before they are ready to turn
dramatically, whilst other markets may take just a few days. I will be
covering this later in the book, once we start to look at the various nuances
which apply to specific markets, as they all behave slightly differently.
The key principles described here still apply. It's just the time frames and
speed at which events occur that changes dramatically, and is due to the
different structure of each market, the role of the insiders in that market, and
the role that each capital market plays as an investment or speculative
vehicle.
The first term we need to understand is accumulation.
The Accumulation Phase
Before the insiders can begin to do anything, they need to make sure they
have enough stock, or inventory, to meet demand. Think of this as a
wholesaler, about to launch a major advertising campaign for a particular
product. The last thing any wholesaler would want to do is to spend time,
effort and money launching a campaign, only to discover that after a few
days there was no more stock. This would be a disaster. Well, funnily
enough, it's the same for the insiders. They don't want to go to a great deal of
trouble, only to find that they have run out of stock. It's all about supply and
demand. If they can create the demand, then they need the supply to meet this
demand.
But, how do they fill their warehouses before starting any campaign? This is
where accumulation comes in, and just like a real warehouse, takes time to
fill. Naturally it’s not possible to stock a large warehouse with one lorry load
of goods. It may take several hundred loads to completely fill, and remember,
at the same time, there are goods simultaneously leaving the warehouse. Just
as filling a warehouse takes time in the real world, so it takes time in our
financial world.
Accumulation then, is the term used to define an 'accumulation phase' which
is the period that the insiders go through to fill up their warehouse, prior to
launching a major marketing campaign on selling their stock. So
accumulation is buying by the insiders, and depending on which market we
are considering, can go on for weeks or months, depending on the instrument
being acquired.
Now the next question, is how do the insiders 'encourage' everyone to sell.
It's actually very simple, and it's called the media. The news media, in all its
various forms, is manna from heaven as far as the insiders are concerned.
Over the centuries they have learnt every trick in the book to manipulate each
news release, every statement, natural disaster, political statement, war,
famine and pestilence, and everything in between. The media is an avaricious
monster, and demands ‘new’ and fresh news items daily. The insiders simply
take advantage of the constant fear and greed which is generated by this
stream of news stories, to manipulate the markets, for many different reasons,
but not least to shake market participants out of the market.
These are the words of Richard Wyckoff on the subject written in the 1930s
"The large operator does not, as a rule, go into a campaign unless he sees in
prospect a movement of from 10 to 50 points. Livermore once told me he
never touched anything unless there were at least 10 points in it according to
his calculations. The preparation of an important move in the market takes a
considerable time. A large operator or investor acting singly cannot often, in
a single day's session, buy 25,000 to 100,000 shares of stock without putting
the price up too much. Instead, he takes days, weeks or months in which to
accumulate his line in one or many stocks."

The word campaign is an appropriate one. Just like a marketing campaign or

a military campaign, the insiders plan each phase with military precision,
with nothing left to chance. Each phase is planned and executed using the
media to trigger the selling. But how does an accumulation phase play out? In
practice, it goes something like this:
An item of news is released which is perceived as bad for the instrument or
market. The insiders grab the opportunity to move the market lower fast,
triggering a waterfall of selling, as they start their accumulation phase,
buying inventory at the lowest prices possible, the wholesale price if you like.
The markets then calm as the bad news is absorbed, before starting to move
higher, which is largely as a result of the buying by the insiders.
Two points here. First, the insiders cannot frighten everyone too much, or no
one would ever buy. If there is too much volatility, with dramatic swings, this
would frighten away many investors and traders, which would defeat the
object of the exercise. Each move is carefully planned with just enough
volatility to frighten holders of stock into selling. Second, the buying by the
insiders may push prices back up higher again too quickly, so they take great
care in ensuring that inventory is purchased in 'manageable' volumes.
Too much buying, would force prices higher quickly, so great care is taken,
and is a further reason why the accumulation phase takes time to complete. It
would simply not be possible to fill the warehouse with just one move lower.
It simply would not work because the numbers are too large. Our simple
examples in the previous chapter, were just to introduce the basic principles.
What happens next is that anyone who survived the first wave of selling is
relieved, believing the market will recover and they continue to hold. After a
period of calm, more bad news arrives, and the insiders take prices lower
once again, shaking more holders out of the market. As they buy again there
is a consequent recovery in the price.
This price action is then repeated several times, each time the insiders
accumulating more and more stock for their warehouse, until finally the last
stock holders give up, and admit defeat. What does this look like on the price
chart?
Fig 5.10 The Accumulation Phase

Whilst Fig 5.10 is a graphical representation of the price action, nevertheless

I hope it gives a sense of what this looks like on a real chart. The repeated
buying by the insiders is highlighted in blue.
I have deliberately avoided using a scale on the chart, either in terms of price
or time, as I believe it is the 'shape' of the price and associated volume bars
which is important. This is the price action which creates the classic price
congestion which we see in all time frames, and which is why this ‘shape’ is
so powerful, when associated with volume. This is what gives price action,
the three dimensional perspective using VPA.
Once the campaign has begun, the price action then follows this typical
pattern, where the market is repeatedly moved higher and lower. This type of
price action is essential to 'shake' sellers out of the market. We can think of
this as shaking fruit from a tree, or as we do in Italy, harvesting the olives!
The tree has to be shaken repeatedly in order for all the crop to fall. Some of
the crop is more firmly attached and takes effort to release. This is the same
in the financial markets. Some holders will refuse to sell, despite this constant
whipsaw action, but eventually they give up after several 'false dawns',
generally on the point when the campaign is almost over, with the insiders
preparing to take the market higher with fully stocked warehouses. So the
campaign comes to an end. It is all over, until the next time!
This is repeated over and over again, in all time frames and in all markets. If
we take the cause and effect rule of Wyckoff, the above price action could be
a 'secondary' phase in a much longer term cycle, which is something I cover
in more detail once we start to look at multiple time frames.
Everything, as Einstein said, is relative.
If we took a 50 year chart of an instrument, there would be hundreds of
accumulation phases within the 50 year trend. By contrast an accumulation
phase in a currency pair, might last a few hours, or perhaps only a few days.
And the reason for this difference is to do with the nature and structure of
market. The equity market is a very different market to bonds and
commodities. In equities for example, this phase might last days, weeks or
months, and I cover this in detail when we look at the characteristics of each
market and its internal and external influences, which create the nuances for
us as VPA traders.
The key point is this. Just recognise the price action and associated volume
for what it is. This is the insiders manipulating the market in preparation for
an extended price move higher. It may be a small move (cause and effect)
based on a short time period, or a more significant move based on a longer
phase. And if you think that perhaps this is a fantasy, let me just quote from
Richard Ney again, and this time from his second book, The Wall Street
Gang.
“On November 22, 1963, the day President Kennedy was assassinated,
specialists used the alibi provided by the tragedy to clean out their books
down to wholesale price levels. After they had accumulated large inventories
of stock, they closed shop for the day and walked off the floor. This prevented
public buy orders from being executed at the day's lows. The specialist in
Telephone, for example, dropped his stock on November 22 from $138 to
$130. He opened it on the 25th at $140! Sacrificing accuracy for expediency,
he admitted to making $25,000 for his trading account.”

Any news, provides the perfect excuse to manipulate the market, and nothing
is exempt. In US equities it is the quarterly earnings season reports which
provide the perfect opportunity. Economic data is also a rich source, whilst
natural disasters can be used for longer term triggers. On an intra day basis,
accumulation is made very easy with the constant round of comments from
politicians, central banks, coupled with the daily stream of economic data.
Life is very easy for the insiders, and to be honest, if we had the opportunity,
we would probably do the same thing as well!
The Distribution Phase
The distribution phase is the exact opposite of the accumulation phase. In the
accumulation phase, the insiders were filling their warehouses, in preparation
for the next phase of the operation, and as I said earlier, the word campaign is
perfect. This is a military campaign with nothing left to chance, as we will
see shortly when I explain about testing.
With a full warehouse, the insiders now need to start moving the price higher,
to encourage the somewhat nervous and jaundiced buyers back into the
market. This is one reason why the insiders dare not frighten everyone too
much, as they simply cannot afford to kill the goose that lays the golden egg!
Whilst the key emotional driver in 'shaking the trees' in the accumulation
phase was fear, the fear of a loss, the key driver that is used in the distribution
phase is also fear, but this time the fear of missing out on a good trade. The
timing here is critical, as the insiders know that most investors and
speculators are nervous, and like to wait for as many confirming signals as
possible, before jumping into a market, fearing they will miss out on a big
move higher. This is the reason most traders and investors buy at a top and
sell at a bottom.
At the top of a bullish trend, traders and investors have seen the market move
higher slowly, then gather momentum, before rising fast, and it is at this point
that they buy, fearful of missing out on any 'quick profits'. This is precisely
the point at which the insiders are preparing to pause and reverse. The same
happens at the bottom of the accumulation phase. The investors and
speculators can take no more pain and uncertainty, they have seen the market
move lower slowly, then gather pace before dropping fast, which triggers
waves of panic sales. Calm is then restored and the market starts to move into
the accumulation phase. Here hope of a recovery is restored, before being
dashed, then restored, then dashed again. This is the way that the insiders
manipulate trader fear, and in many ways we could argue that it is not the
markets they manipulate at all, but trader emotions, which are much easier.
So what is the typical pattern for our distribution phase, and how is it
managed?
First, the market breaks out from the end of the accumulation phase, moving
higher steadily, with average volume. There is no rush as the insiders have
bought at wholesale prices and now want to maximise profits by building
bullish momentum slowly, as the bulk of the distribution phase will be done
at the top of the trend, and at the highest prices possible. Again, given the
chance we would do the same.
The move away from the accumulation phase is now accompanied by 'good
news' stories, changing sentiment from the 'bad news' stories which
accompanied the falling market.
The market continues to rise, slowly at first, with small pull backs, but
nothing too scary. Gradually the market picks up speed, as the bullish
momentum gathers pace, until the target price area is reached. It is at this
point that the distribution phase starts in earnest, with the insiders starting to
clear their warehouses, as eager traders and investors jump in, fearful of
missing out. The good news stream is now constant and all encompassing as
the market continues to climb.
The insiders now have a willing supply of victims to whom they happily sell
to in ever increasing numbers, but careful never to sell the market too hard.
Prices therefore trade in a narrow range, sucking in more buyers on each dip.
Finally, the warehouse is empty, and the campaign comes to an end. Fig 5.11
illustrates the typical price action and volume schematic of the distribution
phase.

Fig 5.11 The Distribution Phase

The example in Fig 5.11 gives us a picture of what is happening here, and
once we begin to think of this behaviour in terms of a full or empty
warehouse, then it will start to make sense. It is very logical, and if we had
our own warehouse of goods we wanted to sell at the highest price, we would
go about this in much the same way.
First we would ensure we had enough stock and then start a marketing
campaign to create interest. Next we would increase the marketing and hype
the sales message – perhaps using celebrities, testimonials, PR, media, in fact
anything to get the message across. A recent and classic example of
marketing hype has been Acai berries (instant and massive weight loss with
no effort – just eat the berries and wait for the results).
This is all the insiders are doing, they are simply playing on the emotions of
the markets which are driven by just two. Fear and greed. That's it. Create
enough fear and people will sell. Create enough greed and people will buy.
It's all very simple and logical, and to help them, the insiders have the
ultimate weapon at their disposal – the media.
This cycle of accumulation and distribution is then repeated endlessly, and
across all the time frames. Some may be major moves, and others minor, but
they happen every day and in every market.

Testing Supply
One of the biggest problems the insiders face when mounting any campaign
is they can never be sure that all the selling has been absorbed, following an
accumulation phase. The worst thing that could happen is they begin to move
the market higher, only to be hit by waves of selling, which would drive the
market lower, undoing all the hard work of shaking the sellers out of the
market. How do the insiders overcome this problem? And the answer is that
just as in any other market, they test!
Again, this is no different to launching a marketing campaign to sell a
warehouse full of goods. Not only do the items have to be correctly priced,
but also that the market is receptive, primed and ready if you like. Therefore a
small test marketing campaign is used to confirm if we have the right product
at the right price, and with the right marketing message to sell in volume.
The insiders also want to test, and once they have completed the
accumulation phase, they prepare to move the market higher to begin the
selling process. At this stage, they are generally moving back into price
regions which have only recently seen heavy selling, so they execute a test to
gauge market reaction and check that all the selling has been absorbed in the
accumulation phase. The test is as shown in the schematic below:
Fig 5.12 is a schematic to explain this principle which is common sense when
we think about it logically.

Fig 5.12 Low Volume Test – Good News!!

The phase of price action we are looking at here follows the accumulation
phase, and prior to this, the insiders will have frightened everyone into selling
by moving prices down fast. Panic selling follows with high volumes in this
area. The insiders then begin to shake the trees for the more obstinate 'fruit'
before they slowly begin to push the market out from this region and to start
the gentle upwards trend, which will ultimately develop into the distribution
phase at the top of the bull trend.
At this point the insiders are moving the market back through an area of
recent heavy selling, and the worst thing that could happen, is for this selling
pressure to return, bringing the campaign to a shuddering halt. The answer is
to execute a test in the rising market which is shown in the schematic in Fig
5.12.
The market is marked lower, possibly on the back of a minor item of bad
news, to test to see if this is likely to flush out any remaining sellers. If the
volume remains low, this instantly tells the insiders that there are few sellers
left, and that virtually all the selling has been absorbed in the accumulation
phase of the campaign. After all, if the sellers were still in the market in any
number, then the candle would have closed lower on above average volume.
The volume is low, as the insiders move the candle back near the opening
price with a 'good news' story, before continuing higher, happy with this
positive result.
These so called 'low volume' tests occur in all time frames and in all markets,
and is a simple way for the insiders to gauge the balance of supply in the
market. They are, after all, trying to create demand here, but if there is an
over supply in the market then this will bring the bull campaign to a halt.
In this case the test was successful and confirms that any selling pressure has
been removed. The precise formation of the candle is not critical, but the
body must be a narrow spread, with a deep lower wick. The colour of the
body can be either bullish or bearish.
With the test now confirmed the insiders can move the market higher to the
target distribution level, confident that all the old selling has now been
absorbed.
Fig 5.13 High Volume Test – Bad News !!

However, what if the test fails and instead of low volume appearing there is
high volume, which is a problem. In starting to move the market away from
the accumulation area, and executing the first part of the test by marking
prices lower, this has resulted in sellers returning in large numbers and
forcing the price lower.
Clearly on this occasion, the selling from the old trading range has not been
absorbed in the accumulation phase, so any further attempt to take the market
higher may struggle or fail.
A failed test means only one thing. The insiders will have to take the market
back lower once again, and quickly, to shake these sellers out. The market is
not ready to rise further, and the insiders therefore have more work to do,
before the campaign can be re-started. This is equivalent to a failed test in an
advertising campaign. Perhaps the pricing of the product is not quite right, or
the marketing message is not clear. Either way, the test has shown that
something isn’t right and needs to be addressed. For the insiders it's the
presence of too many sellers still in the market.
The original 'mopping up' campaign needs to be restarted, to absorb these old
positions. The insiders will then relaunch their campaign again, and re-test
the supply as the market begins to rise. On a failed test we can expect to see
the insiders take the market back into the congestion area once again, to flush
out this selling pressure before preparing to breakout again, with a further
test. Any subsequent test on low volume will then confirm that selling
pressure has now been removed.
Testing is one of the key tools that the insiders use, in all markets. Like
everything else in VPA, it is a simple concept, based on simple logic, and
once we understand the concept of accumulation and the structure on the
chart, we will begin to see tests occurring in all time frames and in all
markets. It is one of the most powerful signals you will see, as it is the
insiders sending a clear message that the market is about to break out and
move higher.
In the example in Fig 5.13 the insiders were testing for any residual selling
pressure, often referred to as 'supply', following the accumulation phase.
With a full warehouse they were all set to roll out the campaign and the last
step was to check that all the selling in the price levels immediately ahead
had all been absorbed. In this case it hadn’t! However, once the test has been
repeated and confirmed with low volume, the market will move higher.

Testing Demand
But what of the reverse scenario, where we are coming to the end of a
distribution phase. The last thing the insiders want is to start a campaign to
begin filling their warehouses again, move back into an area which has seen
high demand (buying pressure) only for the buyers to take the market in the
opposite direction.
Once again a test is employed to make sure that all the buying (demand)
pressure has been absorbed in the distribution phase, and this is done with a
test of demand as the campaign gets under way.
In this case the distribution campaign has been in progress for some time.
The insiders have moved the market from the wholesale price level, to their
target level for retail prices, and are now happily selling on waves of bullish
news. The investors and speculators are rushing in and buying, fearing that
they are missing out on a golden opportunity, and motivated by greed. The
insiders pull in more demand by whip sawing the prices and gradually
emptying their warehouses of all the inventory of stock.
Finally, when the campaign is complete, it's time to start the next phase of
moving the market lower, and as the trend starts to develop, the price action
moves back into areas which only recently had seen high volume buying.
Once again a test is required, this time to test demand. If the demand is low,
then all the buying has been absorbed in the distribution phase as we can see
in the schematic in Fig. 5.14.
Fig 5.14 Low Volume Test – Good News !

Here we have the end of the distribution phase. The warehouses are empty,
and the next stage is a sharp move lower, to repeat the process and move into
an accumulation phase once again.
As the distribution phase ends, the insiders want to make sure that there is no
demand still remaining in price areas which, until recently, had seen strong
buying during the entry into the distribution phase. Once again, they test. The
market is marked higher using some news, and if there is no demand, closes
back near the open, with very low volume. This is what the insiders want to
see. No demand, as shown by the low volume. They are now safe to start
moving the market lower, and fast, as they now need to replenish their
warehouses again.
Fig 5.15 is definitely NOT what the insiders want to see as they prepare to
move away from the distribution price region. The market is marked higher
and buyers flood in, thinking that the bullish trend is set to continue and
move higher still. As before, a failed test stops the campaign in its tracks, and
the insiders have to move back into the distribution price area, and clear these
buyers out of the market, using the same processes as before. Once complete,
then a further test is made, and if on low volume, then the trend lower will
gather pace, and move quickly away from the distribution region, trapping
traders into weak positions at this level.
Fig 5.15 High Volume Test – Bad News !

Now we know what to look for, you will see testing occurring ALL the time,
ONCE this has been preceded by an accumulation or a distribution phase. We
may even see a series of tests, perhaps the first has low volume, followed by
a second or third which have lower volume still. This is simply confirming
that the insiders are preparing the next phase of a campaign, and the key is
simple. Once prices break away from the congestion areas created during
these two phases, we can be assured that the next stage is then under way.
Before moving on to consider the selling climax and the buying climax, at
this point in the book I think it's appropriate to answer a couple of questions
which sometimes puzzles both traders and investors.
The first question is – why do markets take longer to rise than to fall, and is
this something to do with the insiders?
The second question is – over what time frames do these cycles of filling and
emptying the warehouse typically last?
Let me answer the first, which also leads into the second. Market insiders
only have two objectives. The first is make us fearful and the second is to
make us greedy. They have no purpose in life, other than to create emotional
responses which will ensure that we always do the wrong thing at the wrong
time, but they always do the right thing at the right time.
A quote from the late great John Templeton who wrote:
“Heed the words of the great pioneer of stock analysis Benjamin Graham:
‘Buy when most people…including experts…are pessimistic, and sell when
they are actively optimistic.’”

Let's think about this logically and try to answer the first question. The
markets have been in free fall, with panic selling by investors and traders.
Then comes a period of calm as the market moves sideways into the
accumulation phase, as the warehouses are stocked up ready for the move
higher.
Now at this stage, remember, that from an insiders point of view, they have
just frightened everyone to death, and the last thing they want to do, is to
suddenly send the market soaring in the opposite direction. This would soon
drive every investor and speculator away. After all, there is only so much
emotion that traders can take, and too much too soon would quickly kill the
goose that lays the golden egg. A calm approach is required. The tactic now
is to quietly start to build confidence back up, moving prices higher steadily,
without frightening anyone out of the market, and gradually drawing the
buyers back in.
Soon, the panic selling is forgotten as the markets recover and confidence is
slowly restored. This also suits the insiders, as they have a full inventory to
sell, and want to take their time, and certainly don't want to see large volume
buying as they move the market higher. At this stage, it is is about
maximising profits, and the biggest profits are to be made once the
distribution target price levels are reached at the retail level. It would be
madness to suddenly mark up the market to the retail level, as many investors
would then feel they had missed out on the move, and not join in later.
The strategy here is one of confidence building by taking the market higher
slowly, and then gradually to move faster, generating the belief in the
investor or speculators mind that this is a market with momentum, which is
gathering pace all the time, and is an opportunity not to be missed to make
some easy money.
The upwards trend then starts to gather pace, moving higher in steps, pausing,
reversing a little, drawing in buyers, tempting others, then moving higher
still, until close to the distribution area, the market picks up speed as buyers
crack under the emotional pressure of missing out, and jump in.
Throughout the upwards journey, the inventory is gradually reduced, but
topped up in minor reversals with sellers taking their profits, and helping to
maintain levels for the final phase of the campaign.
This is the emotional journey that the insiders have mastered. It is the reason
markets move higher in a series of higher highs and higher lows, with pauses
and minor reversals along the way. It is a confidence building exercise,
designed to restore confidence after the fear, and replace it with another
emotion – greed. These are the two levers that the insiders have, and they are
used to devastating effect, and the only weapon that you have in your
armoury is VPA.
After greed comes fear – again!
With their warehouses now empty, the insiders need to get back to the
'bottom' and fill them up as quickly as possible. Again, we would do exactly
the same thing in their position.
However, the insiders have nothing to sell now, and the only way to make
money fast is to refill the warehouse again and begin another campaign. The
market crashes lower, panic selling ensues, fear is triggered and the
warehouses are filled once more. And so the cycle repeats, time and time and
time again. The best analogy I can think of here is of an old fashioned helter
skelter that we might see at a fair ground. It takes effort to get to the top,
walking up all the steps, but the slide down on a mat is very quick! That's
how the markets work. Up in stairs and down in elevators. The old fashioned
board game of ‘snakes and ladders’ expresses this effect perfectly, it’s up on
the ladders, and then a slide all the way back down on the snake!
I hope this is now beginning to make sense, as it is only once we start to think
of the markets in these terms that we begin to realise how anyone, other than
the insiders, ever makes money. This is another point. The insiders have to be
careful, for the simple reason that if the price action was continually and
unrelentingly volatile, then traders and investors would look elsewhere for
investing and speculating opportunities.
Just like Goldilocks and her porridge, the motto here is 'not too hot and not
too cold'. The insiders have learnt their craft and honed their skills over
decades. Most investors and speculators lose. You are lucky. By the end of
this book you will become a VPA expert and be able to see and recognise all
the tricks they play. They are there in plain sight and all we have to do is
interpret the signals and then follow the insiders. It really is that simple.
Moving to the second question which was how often is this cycle repeated?
And here I will let you into a secret. This was a question I wanted to ask
Albert Labos all those years ago as we sat in a rusty cabin on the President
learning all about the market makers (as he referred to them) and their tricks.
I actually wrote down the question and asked my neighbour in the class, but
he didn't know the answer either.
What I thought at the time was this. I understood about the accumulation and
distribution phases which made perfect sense to me, but then I started to
think. Also, remember that at the time we were really looking at trading
indices, so essentially long cycles. I thought to myself that if the cycle was
perhaps 10, 15, or 20 years, then this was a long time for a market maker to
wait to make a profit from his (or her) buying and selling. Perhaps it was
longer, and from one big market crash to another. Perhaps it was decades? I
didn't dare ask the question at the time, and now I wish I had!
The answer to the question is that these cycles occur on all time frames from
tick charts, to 1 minute charts, to 15 minute and hourly charts, and to daily,
weekly and monthly charts. The best way to think of this is to imagine a set
of nested Russian dolls.
The smallest doll, fits inside a slightly larger doll, which fits inside a larger
doll, and so on. In the context of these cycles, we can imagine the same thing
with a chart. An accumulation and distribution cycle on a one minute chart,
may last a few hours, and be part of a larger cycle on a slower time frame
chart, which in turn itself will be part of a larger cycle and so on. This is an
important concept to grasp, as it brings in two important aspects of market
behaviour.
First, that these cycles happen in ALL time frames, and second that by
watching price action across multiple time frames you will start to see these
cycles developing and unfolding and confirming one another as a result. A
cycle that has already started on a one minute chart, will be setting up on 5
minute chart, and possibly just developing on the 15 minute chart.
Let me quote from Richard Ney again and his book The Wall Street Gang,
books every trader and investor should try to read. They contain a wealth of
information, and they give us a broad perspective on volume and price, along
with an excellent view on how the specialists manipulate the markets. Whilst
the books primarily focus on stocks, the principles are identical and relevant
to all markets. In equities it's the specialists, insiders or market markets, in
futures it's the large operators, and in spot forex it's the market makers again.
This is what he says about time frames :
“The specialist's objectives can be classified in terms of the short,
intermediate and long term. Thus we can see that there are three broad
classifications into which we can place the market's price movements.

He then goes on to say

“The short term trend. This can last from two days to two months. Within this
trend there can be even shorter term trends lasting no more than several
hours. The importance of the short term trend is that it is within this context
that the specialist resolves his day to day inventory problems with his
intermediate and long term objectives always in view. It is as though the
short term trend is the spade with which the specialist digs the investor's
intermediate and long term grave.”

“The ticker tape provides us with a microscopic view of the techniques of big
block distribution at the top and big block accumulation at the bottom on
behalf of the specialist's inventory.”

“It is impossible to look solely at the tape as it passes in review and hope to
determine longer term trends in the market. One can understand the tape and
decipher its code of communication only when experience is shaped through
memory – or through the use of charts. In a manner of speaking short and
long term charts provide both a microscopic and a telescopic view of what
has happened. In the final analysis, we need both in order to make financially
rational decisions.”

The reason that I have quoted this section from his book here, is that it neatly
sums up the points I am trying to convey in this chapter.
Remember, this book was published in 1974, when the ticker tape was still in
use, but we can replace the ticker tape with an electronic chart, on a short
time scale. The concepts and principles are the same. We use the fast or ultra
fast time frame as our microscopic view on the market, and then zoom out to
our longer term time frames to give us that broader perspective on the volume
and price relationship.
Now again, this is all relative, so for a scalping trader, this might be a 5
minute, 15 minute and 60 minute chart. A swing trader may consider a 60
minute, 240 minute and a daily chart. A trend trader may utilise a 4 hour,
daily and weekly chart.
Therefore, regardless of the trading strategy and market, equities,
commodities, bonds or forex, the point is that to succeed as a speculative
trader or as an investor, the VPA relationships should be used in conjunction
with multiple time frames. On a single chart VPA is immensely powerful, but
when the analysis is ‘triangulated’ using slower time frames, this will give
you a three dimensional approach to the market.
There is nothing wrong with focusing on one chart, but remembering the
analogy of our three lane highway, where we are sitting in the middle lane
with our wing mirrors on either side giving us a view on the fast and slow
lanes, this will help to build confidence levels, while learning, and more
importantly once you start to trade live.
To round off this chapter, I now want to focus on the the last two concepts of
insider behaviour, namely the selling climax and the buying climax, before
putting the whole cycle together in some simple schematics to help fix the
broad principles.

The Selling Climax

As I outlined earlier in the book there is a degree of confusion about these
two concepts, so let me try to explain. In the past, most people who have
written about this subject, have done so from a personal perspective. In other
words, when we buy or when we sell in the market. However, in the context
of the insiders it is what they want us to do. Their sole objective is to get us to
buy in the distribution phase, and to sell in the accumulation phase.
In terms of 'who is doing what' during these two phases, in the accumulation
phase, the 'public' are selling and the insiders are buying, and conversely in
the distribution phase the 'public' are buying and the insiders are selling.
This book is written from the perspective of the insiders, the specialists, the
big operators and the market makers, and hopefully like me, you want to
follow them! I hope so at any rate. As Albert used to say, we want to buy
when they are buying, and sell when they are selling. Simple! Which is really
what this book is all about.
When I describe and write about a selling climax, to me, this is when the
insiders are selling and occurs during the distribution phase of the campaign.
A buying climax is when the insiders are buying during the accumulation
phase. To me, this just makes more sense. It may be a question of semantics,
but it is important, and I would like to clarify it here, as many people refer to
these events the other way round!
Just to be clear, a selling climax appears at the top of the bullish trend, whilst
the buying climax appears at the bottom of a bearish trend, and reflects the
actions of the insiders, and NOT the public!
The selling climax is the 'last hurrah' before the insiders take the market
lower. It is the culmination of all their efforts, and is the point at which the
Peak or Climax
warehouse is almost empty and requires one last big effort to force the market
higher, drawing in those nervous traders and speculators who have been
waiting and waiting for the right time to jump in, and can finally wait no
longer. They give in to the fear of missing out, and buy.
This happens two or three times on high volume with the market closing back
at the open, and at the end of the distribution phase. Following the selling
climax, the market then breaks lower, and fast. This tranche of buyers, along
with all the others, is then trapped at this price level, as the insiders move the
market away from this region and back down the helter skelter to begin the
process again.
Let's look at a typical example of what we might see as the selling climax
marks the end of the distribution phase, and we can think of it in terms of
fireworks – this is a firework display which marks the end of the event!
Once again, Fig 5.16 is simply a schematic of what to expect in the selling
climax. Here the insiders have taken the market to their target level, at which
they are selling inventory at retail prices, to happy buyers who believe that
this market is going to the moon.
Fig 5.16 The Selling Climax – Firework Show

The insiders are happy to oblige, selling into the demand, moving the market
lower, then back higher drawing in more demand, until they are close to
clearing their inventory.
At this stage the price action becomes more volatile with surges higher
followed by a close back to the open price, with increasing volumes of buyers
flooding into the market, fearing they will miss out on the next leg up in the
bullish trend. The next leg is in the opposite direction.
Finally, the inventory is cleared and the market sells off, moving lower and
back out of the distribution phase. The clues for us, as VPA experts, are there
to see.
Here we will see high volume coupled with a candlestick which has a deep
upper wick and narrow body, and is one of the most powerful combinations
of price action and volume we will ever see on a chart. Naturally, I will be
covering this in detail later in the book.
These are the 'upper wick' candles that we looked at in chapter 3, and as I
explained there, they are immensely powerful and reveal so much,
particularly when combined with volume. The insiders are having one last
effort to clear their inventory and mark prices higher early in the session.
Buyers flood in, taking the market higher, fearful of missing out, with high or
ultra high volumes, before the insiders take the market lower to lock these
traders into weak positions, helped lower by profit taking. Some traders will
sense that the market is 'over bought' at this level.
This price action is repeated several times, with the insiders selling into the
demand, each time the price is pushed higher, before closing the candle lower
at or near the opening price, helped by profit takers closing out.
The colour of the body of the candle is unimportant. What is important, is the
height of the wick, the repeated nature of this price action, and the associated
high volumes. This is sending a clear signal that the market is ready to move
fast, and as the warehouses are all empty, the reaction will be quick. The
insiders are now jumping on their mats, and heading off down the helter
skelter, back to 'square one' to begin the process once again with an
accumulation phase. When we see this price action, following a distribution
phase, it's best to be in front of your screen – ready and waiting! Now let's
look at the opposite of the selling climax, which is the buying climax. This is
the firework party that marks the end of the accumulation phase, and signals
the start of the bullish trend higher.
Fig 5.17 The Buying Climax – Firework Show ( Again!)

The buying climax is simply a selling climax in reverse. The insiders have
taken the market lower, panic has been triggered and fearful sellers are
closing positions. See Fig 5.17.
The insiders then move into the accumulation phase to restock the
warehouse, and move prices back and forth in a tight range, to shake out any
last remaining tenacious sellers.
Towards the end of this phase, the insiders than mark prices down rapidly,
flushing out more sellers, before moving the price higher later in the session
to close somewhere near the opening price, helped higher by their own
buying in the market, with bargain hunters also sensing that the market is
'over sold' at this level.
This is repeated several times, with panic selling continuing as frightened
investors and speculators can take no more. They capitulate and throw in the
towel. This is the last hurrah.
The insiders are now ready, with warehouses over flowing with stock, to start
the march north, and begin the bullish trend higher, in nice easy steps,
towards the target price for distribution.
Once we accept the fact that all markets are manipulated in one way or
another, then the rest of the story simply fits into place.
The above is very logical, and common sense, but don't be misled into
thinking that this is simply not possible with the current legislative authorities
now in place. Nothing much has changed since the days of Wyckoff and Ney,
and here let me quote from 'Making it in the Market' published in 1975.
This was a telephone conversation that Richard Ney had with an SEC
(Securities and Exchange Commission) official. The SEC is supposed to
regulate the financial world in the US.
Remember, this is 1975, and this it what was said on the telephone call, when
the official was asked about checks on specialists and how they are regulated:
“specialists are under the Exchange. We don't get too concerned with them.
They're not directly regulated by the Commission. They all operate under self
regulation. They make their own rules – the Commission just O.K's them.
Only if the Commission feels there is something not proper does it take
exception. We check broker-dealers but we never go onto the Exchange to
check out specialists.”

So has anything changed?

In reality very little, except to say that trading is now largely electronic, and
one of the many problems faced today by the SEC is HFT or High Frequency
Trading.
There are the usual cases, where individuals and firms are taken to task to
prove that the SEC and others have some sort of control and to assuage the
public, that the markets are regulated in a fair and open way.
Sadly, as I hope the above shows, and in using VPA live will quickly prove
to you, this is most certainly NOT the case. The insiders are FAR too
experienced and wily to allow their golden goose to be killed off. They
simply devise new and more elegant ways to manipulate prices for their own
ends.
Let me quote from a recent release from the SEC in response to the issue of
HFT :
“There are a number of different types of HFT techniques, and an SEC
Concept Release [6] broke them down to four main types of strategies:

Market making: like traditional market making, this strategy attempts to

make money by providing liquidity on both sides of the book and earning the
spread.

Arbitrage: Trading when arbitrage opportunities arise ( e.g. from mis-pricing

between Indices, ETF's or ADRs and their underlying constituents.

Structural: These strategies seek to take advantage of any structural

vulnerabilities of the market or certain participants, and include latency
arbitrage or quote stuffing.

Directional: These strategies attempt to get ahead of – or trigger – a price

move, and include order anticipation and momentum ignition.”

And the date of this report? - late 2012.

I don't wish to labor the point, but I am conscious that some people reading
this book may still consider me to be a 'conspiracy theorist'. I can assure you,
I am not.
As Ney himself points out :
“ most of those in government doing the investigating are beholden to the
Stock Exchange in one way or another (via campaign contributions or
through their law firms), or hope (if they are commissioners and chairmen of
the SEC) to be employed in the securities industry at some not too distant
date, nothing ever comes of these investigations.”

Let me round off this chapter by creating a simple schematic, which I hope
will help to put all of this into perspective.
Here it is, the complete market cycle, or as I like to call it – ‘another day at
the office’ for the insiders, and this should hold no surprises. See Fig 5.18
The first campaign is the accumulation phase. The insiders start to fill their
warehouses, which are empty following the sharp move lower, at wholesale
prices.
Once the warehouses are almost full, the buying climax then begins, with
some volatile price action to draw in more stock, but once complete, they
then exit from the price region and test for supply. If all the selling has been
absorbed, the insiders can start marking the market higher in steps, building
confidence back into shell shocked investors and speculators who are still
recovering.
As confidence returns, so the trend starts to gather momentum, drawing in
buyers who now believe that the market will 'go to the moon'. Even cautious
investors succumb and buy, just as the price is reaching the target area for
retail prices.
With the market now at the retail level, more buyers are sucked in as the
distribution phase starts in earnest, with prices moved higher to draw in more
buyers, then lower to lock them in to weak positions. Finally the selling
climax begins, with volatile price action, and the remaining inventory is
cleared from the warehouses. Once empty, the market breaks lower, through
this price area, and once again a test is executed, this time of demand. If the
test confirms that buying in this region has been absorbed then the campaign
is complete, and the market is moved lower fast.
The cycle is complete, and it only remains for the insiders to count their
profits and repeat the exercise, again, and again, and again and … well I'm
sure you get the picture.

Fig 5.18 The Market Cycle – Another Day At The Office!

The important point to remember here, is that this cycle could be in any time
frame and in any market. The above could be on a 5 minute chart for example
of a currency pair, and perhaps over a few hours. It could equally be on a
daily chart of a stock, and perhaps last weeks or even months. It could be on
an hourly chart for a futures contract, and in this case the insiders would be
the large operators, with the cycle perhaps lasting a few days or a week. The
time scale is unimportant, other than in remembering Wyckoff's rule of 'cause
and effect'.
Once we begin to study charts in detail we start to see this cycle occurring
repeatedly, and armed just with the information in these early chapters, is
enough to help traders and investors truly understand how the markets work
and trade with confidence, as a result.
However, for a VPA trader it is just the starting point.
Before moving on to the next chapter let me try to 'frame' the context of what
I have covered so far, not least because it is something that took me some
time to absorb when I first started studying Volume Price Analysis.
Therefore, what I want to do here is to summarise what has been covered so
far, starting with the concept of market manipulation, and try to explain what
we mean by this phrase. Do we mean the insiders are free to simply move
prices higher and lower at random and whenever it suits them to do so. The
answer is NO. What I mean by market manipulation, which is perhaps
different to other peoples view, is that this simply means using every
available resource, to either trigger fear or greed in the retail traders mind.
This means using every piece of news in the media to influence the buying
and selling, and to move the market in the direction that the insiders require,
either higher to a distribution phase, or lower to an accumulation range.
This is what I consider to be market manipulation. It is the creation of an
environment, which in turn creates either fear or greed in the mind of the
investor or the speculator. As I said earlier, market manipulation is not so
much about manipulating the price, but manipulation of the twin emotions of
fear and greed. Fear triggers selling and greed triggers buying, and the media
in all its forms, is the perfect tool to create both.
Next, whilst the insiders all work together, this is NOT a cartel. There are
many hundreds of specialists and market makers, and this simply would not
be feasible. What does happen however, is that the insiders will all see
strength and weakness at the same time. They have the advantage of seeing
both sides of the market, all the buy orders and all the sell orders, and
therefore true market sentiment.
What they cannot hide is volume, which is why it is so powerful. It is the
only way we have of seeing when the insiders are involved in the price
action, and if they are, whether they are buying or whether they are selling.
When they are buying in the buying climax, we see it, because we have high
volumes. When they are selling in the selling climax, we see it, because the
volumes are high, and this is what you have to understand. It is the volume
which is important not the manipulation element of the VPA, which brings
me to another point.
I am often asked how the insiders decide on the target levels for accumulation
and distribution, and this was something I struggled with myself. Are these
just arbitrary levels decided in advance, or is there some logic that can help
us to make sense of this aspect of price behaviour. Well the 'make sense'
element is really this, which also helps us to understand the price behaviour
that we see at these levels.
On any price chart, there are levels of price congestion that create the natural
levels at which markets could be considered to be 'over sold' or 'over bought',
terms which I introduced earlier in the chapter. These price levels are
absolutely fundamental to the principles of VPA for two reasons. First, they
represent areas where the market is either likely to find support, or is equally
likely to struggle. They define barriers, areas where the market has paused in
the past, and either moved on or reversed from these regions. I will explain
these in more detail shortly, but for the time being accept the fact they exist,
and are created during the phases of accumulation and distribution, as the
market moves into sideways consolidation.
Now these 'phases' of price action appear all over our charts and in every time
frame, and the insiders will be well aware of where these are and whether
they are well developed areas, or simply minor areas where price in the past
has perhaps paused before moving on. In preparing any campaign, the
insiders therefore target these regions, as potential natural points for
accumulation and distribution. This also explains the price action once we
finally arrive at these areas.
Let's start with the distribution phase and consider what is actually happening
during the selling climax?
The market has risen higher and accelerated on bullish news, and has arrived
at the target area, which is potentially one where the market can be
considered to be 'over sold', in other words, potentially weak and/or
exhausted. We know this because these are the areas that insiders target
before a campaign starts. Following the bullish trend higher, which has been
supported with positive news, and increasing numbers of buyers entering the
market, the insiders now pause at this level, and begin the job of distribution.
The initial phase of the distribution is executed purely from the momentum
already driven into the market by the insiders, so the volume here will be
high but not excessive. On any 'up' candles the volumes here will represent
'natural' buying by investors and speculators. In other words the insiders are
not having to 'force' the market higher at this stage. They are simply selling
into demand that has been created during the trend higher, and buyers are
now in the 'greed' mindset. Any selling at this level, at this stage is again,
'natural' selling, as holders who have bought into the trend earlier, perceive
that the market is perhaps struggling at this level, and decide to take their
profits. The key point here is that the associated volumes during this phase
are likely to be well above average but not excessive.
There will certainly be signals of weakness as we will see shortly, once we
start to study the charts in detail, but this first phase of distribution, is what I
call the 'natural' phase. This is the insiders simply meeting demand from
greedy investors and speculators. Any selling is absorbed back into their
inventory, and resold. The news is then used to move the market higher and
lower in this range as the warehouse stock continues to dwindle. Diminish gradually in size
The final phase is the selling climax, and this is where effort is required by
the insiders. Now the market is very weak at this level. Perhaps the news is
not quite so bullish as before, and the insiders are having to 'force' the price
higher, using whatever news they can to pull in more buyers.
But with a weak market the buyers are now becoming overwhelmed with the
sellers, which is why we see the price action reflected in the candles during
the selling climax. The insiders now have a real struggle on their hands,
desperately trying to keep the market propped up, forcing it higher,
desperately selling in large volume to buyers, but as the volumes of selling
increase, this in turn leads to falling prices, adding downwards pressure on
the market.
This is the problem that all campaigns have eventually. The problem is
simple. Sell in large enough volumes and ultimately the price will fall,
working against you. It is this battle to keep the price high, but also to move
inventory in volume that we are seeing played out in this final dramatic
scene. It is the battle that insiders have to face at this stage.
The problem is one of moving large volumes fast, without moving the price
down fast, undoing all the good work of earlier in the campaign. It is a fine
balance, and this is the balance that you see in those last few candles at the
end of the selling climax. The insiders are battling to force prices higher,
supply the demand in ever increasing volumes without letting the price
collapse, which is why we see the price behaviour in these candles. Let's take
another look.

The Selling Climax

Fig 5.19 Selling Climax

What is happening here in Fig 5.19 is that in trying to meet demand by

selling in large volumes, the selling by the insiders, is forcing the price back
down again. We really only have to equate this to some real life examples.
Scarcity in a product increases its value. Think of designer goods, branded
items, luxury goods. If we want to increase the value of something then we
make a 'limited edition'. This allows us to sell the item at a higher price, as
there are fewer available and they are therefore more desirable. By contrast
the price of a mass market product will be much lower by virtue of the
numbers made, and the market unlikely to stand any increase in price.
Whenever large institutions have to sell large blocks of stock at the top of the
market, they don’t just place one order for the entire block. This would drive
the price down and reduce the profit on the sale, so in order to overcome this
problem there is a facility which many large companies use called 'dark
pools'.
Now I did say at the start of this book that volume was the only activity that
could not be hidden. Well this is not strictly true. Large institutions use dark
pools to hide large transactions, and the details are not made public until after
the trade has been completed.
There is no transparency, and once again, is something few traders or
investors are ever aware of. It's not a huge issue for us, and anyway, there is
little than can be done about it.
However, this does reinforce the point. When a large block has to be sold,
executing this in one order would drive the price down too far, so the
alternative is to either break the order into smaller blocks and sell in smaller
volume, or to use the dark pool to hide it completely.
The same problem occurs in the buying climax, where the insiders are buying
in large volume, which in turn starts to raise the market as a result. Nick
Leeson, the rogue trader who bankrupted Barings Bank had the same
problem. His positions were so large, that it was impossible to unwind them
without moving the market against his own buying and selling.
Finally, another example is when trading an illiquid stock, or currency.
Buying in volume will very quickly put the price up against you. Sell in
volume and the price will move lower. This is the problem that the insiders
face, when they are selling or buying in large volume. The price will always
move against them as a result, which is why they cannot simply complete all
their selling or buying in one session.
It has to be done over two, three or four, and is another reason why the
distribution process, the selling climax and the buying climax have to be
spread over a period. This was one of the issues I struggled with for some
time when I first started, but I soon learnt we simply have to be patient, and
wait for the climax to complete. Remember it takes time to sell large volumes
quickly!
The Buying Climax
It is the same problem with the buying climax. It is the sheer scale of their
own buying which results in the market price rising, coupled with short
holders closing positions. But, the predominant effect, once the insiders enter
the market is the volume effect on price. If we go back to our buying climax
example once more :

Fig 5.20 Buying Climax

The market is still bearish, and the insiders are forcing the market lower with
negative news, and then buying in volume to fill the warehouses which in
turn is moving the market higher against them. The action is stopped and the
market moves sideways, temporarily.
More bad news is then used to send the market lower, where large volumes
are bought once again, with the market rising on the insider buying. This is
repeated until the warehouses are full.
In many ways, it doesn't really matter whether we believe the market
manipulation aspect of price behaviour or not. What is EXTREMELY
important, is that you do believe in the relationship between price and volume
in these phases of market behaviour.
The ultra high volumes are showing us, more clearly than anything else, that
the market is preparing for a reversal in trend. When we see the price action
and high volumes associated with a selling climax, then we know that there is
a trend reversal lower in prospect. When we see the price action and high
volumes of a buying climax, then we know that we are likely to see a bullish
trend starting soon. It’s guaranteed.
This is what high volume and the associated price action is telling us. It really
couldn't be any clearer.