The S&P 500 is shaping up into a clear Wyckoff Distribution pattern. Based on price action, volume analysis, and the current market structure, a possible Upthrust After Distribution (UTAD) could be forming, setting up a classic bull trap. Let’s dive into the key phases of this distribution cycle.
Wyckoff Distribution Phases with Volume Analysis:
Preliminary Supply (PS)
Early signs of distribution begin as smart money starts selling into the uptrend. This phase sees an uptick in volume, with price still moving higher. Larger players are offloading positions while retail traders continue to buy, unaware of the distribution at play.
Buying Climax (BCLMX)
Price reaches a peak, marked by a significant volume spike. Retail traders are buying heavily here, but smart money is quietly selling into this rally. Despite increasing volume, price struggles to make meaningful gains beyond the climax, indicating that supply is starting to dominate.
Automatic Reaction (AR)
Following the Buying Climax, the market enters an Automatic Reaction, where price pulls back sharply. This phase is characterized by large candles, showing strong selling pressure. Volume remains elevated, as the sharp decline reflects the market’s initial response to the excess supply that was introduced during the Buying Climax.
Tests
After the AR, the market attempts to retest previous highs, but volume decreases during these upward moves. Each test of the highs shows a lack of buying strength, with price struggling to regain momentum. The weakening demand during these tests confirms that the distribution is still in play and buyers are losing control.
Upthrust (UT)
The Upthrust is a false breakout above resistance, where volume spikes again. However, the price fails to sustain the breakout, signaling that market makers are absorbing buy orders. The combination of higher volume with limited price follow-through is a clear sign that the larger participants are offloading positions while retail traders are still buying into the move.
Sign of Weakness (SOW)
In this instance, the SOW didn’t fall as far as expected, suggesting that much of the supply was absorbed earlier. Volume increases, but the shallow price drop indicates that the market is preparing for a potential UTAD. A shallow SOW often precedes a more powerful Upthrust After Distribution, where price rises to trap buyers before the final markdown.
Upthrust After Distribution (UTAD)
The UTAD represents a final false breakout above the previous highs (BCLMX and UT), with high volume as breakout traders jump in, thinking the market is turning bullish again. Once these buy orders are absorbed, expect a sharp reversal. The UTAD serves as the final trap, marking the completion of the distribution phase and leading to the markdown.
Absorption, Bull Trap, and Market Psychology:
In this distribution, market makers have been absorbing buy orders throughout the phases, especially during the Tests, and should see the same during the upthrust. The shallow SOW gave retail traders the false impression that the market found support, leading them to buy dips with confidence. A powerful UTAD would act as the perfect bull trap, drawing in breakout buyers and triggering stop-losses for short sellers. This false breakout would generate liquidity for smart money to sell into before the markdown phase.
The psychology behind this setup is simple: retail traders are lured into thinking the price is breaking out, only to be caught off-guard by a sharp reversal. If we do see a breakout and a relatively quick return back into the range, we should see continued absorption at remaining levels, then the markdown begins.