Accumulation Phase

After a downtrend, the accumulation phase occurs in the market cycle. During this stage, institutional investors begin purchasing in tranches, indicating an upcoming positive uptrend.

What Is the Accumulation Phase?

The Accumulation phase is the stage at which the institutions anticipate great potential in undervalued security and start building up their position. They cannot buy their entire position in one single order as the volumes of the security would shoot up, resulting in the market noticing unusual activity. Therefore, they buy these securities in tranches to avoid getting detected by the market participants. At this stage, the security has been under a strong downtrend, triggering a bearish sentiment around it causing the institutions to be able to buy the security at a very attractive price.

What Is a Market Cycle?

Originally derived from the stock markets, market cycles are repetitive patterns or trends that are formed in financial markets.  There are four main stages that are part of a regular market cycle: accumulation, run-up, distribution and run-down. These four cycles are always seen in the same sequence, which is why traders aim to detect stocks in the accumulation phase to be able to buy the asset before it starts its uptrend. 

During the accumulation phase, the selling volumes are almost flattened as the majority of the sellers have exited their positions. Due to the bearish sentiment, there is a lack of buyers that makes the asset trade sideways, and this is when institutional investors step in. They take advantage of the sideways trend and start accumulating the security in small loads without indicating to the market – it helps keep the price at a discounted level. 

It is important to note that an accumulation phase can be mistaken for a distribution phase, which is seen right before the decline in a stock. This is why investors should be cautious and make sure they research properly and wait for a clear breakout as a confirmation.

Trading the Accumulation Phase

The accumulation phase tends to form clear swing highs and swing lows. The only downside of swing trading security in the accumulation phase is that the range might be too tight, causing the profits to be limited.

Check out our guide on scalping vs swing trading!

 The accumulation phase has no set time period as to when it could break out and start the run-up phase. This attracts value investors as they have the patience that traders may not since the accumulation phase usually goes on for over a year!

Traders prefer to add securities that are in the accumulation phase to their watchlists as they would enter once a clear breakout occurs. They prefer doing so as securities may even spend multiple years in the accumulation phase. Therefore, rather than parking their capital in a sideways trend, traders look for better opportunities. 

Example of Accumulation Phase

In the weekly chart of Spotify above, we can clearly see the accumulation phase.

The accumulation phase started after a strong downtrend, which took Spotify from $195 to $100 – the level where the market bottomed out. At this point, investors started accumulating their position in Spotify. 

As we mentioned earlier, the accumulation phase can last for a longer period as well which was the case for Spotify as it consolidated from 2019 to mid-2020. Traders would have stepped in once a breakout was seen in May 2020, however, they would have had to buy Spotify at a higher price of $200 as compared to value investors who got to accumulate near $100 to $140.