Lesson T4.1 · 1 of 7 · Trend, support and resistance
Market structure: highs, lows, trends and the four market phases
Market structure is the sequence of highs and lows on a chart. In an uptrend, each high and each low is above the one before; in a downtrend, below; in a sideways market, the price swings between the same levels. An uptrend is called into question when the price closes below its last low.
Terms in this lesson
- Support and resistance
- Prices at which a stock has often stopped falling or stopped rising.
- Bull market
- A period in which the stock market rises at least 20% from its last low.
- Bear market
- A period in which the stock market falls at least 20% from its last peak.
Uptrend, downtrend and sideways: how to tell them apart
Definition
What is market structure?
The sequence of peaks (highs) and troughs (lows) the price makes.
Prices do not move in straight lines: they move in waves. The top of a wave is a high, the bottom is a low. Compare each high with the previous high and each low with the previous low, and you can see which way the market is heading. The idea comes from Dow theory, one of the oldest ideas in technical analysis.
- High
- Low
- Higher high
- Higher low
- Higher high
- Higher low
- Higher high
The price climbs in waves from 100 to about 115. The highs reach 105.66, 108.50, 111.99 and 115.29, and the lows between them 101.90, 104.70 and 107.69: each one above the last.
| Trend | Highs | Lows |
|---|---|---|
| Uptrend | higher and higher | higher and higher |
| Downtrend | lower and lower | lower and lower |
| Sideways | at roughly the same level | at roughly the same level |
When the highs and the lows are not moving in the same direction, the market has no clear trend yet.
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Create a free accountWhen market structure breaks
In an uptrend, the most important point on the chart is the last higher low. As long as the price stays above it, the structure is intact. The first sign of fatigue is a high that fails to get past the previous one.
Definition
What is a break of structure?
The price closes below the last higher low (or, in a downtrend, above the last lower high).
It is the first clear sign that the trend may be ending. It does not tell you where the price goes next: a fall may follow, but so may a sideways period, and sometimes the price simply resumes its climb.
The four market phases: accumulation, markup, distribution, markdown
Over the longer term, many analysts split the price’s journey into four phases that repeat. The model is linked to Richard Wyckoff, and Stan Weinstein described it as four stages in his 1988 book.
Forty days. After a short fall, the price holds between about 90.4 and 93.6 (accumulation), climbs to about 105 (markup), swings between about 104.6 and 108.7 (distribution), then falls to 95 (markdown). Volume is heavier in the markup and markdown phases.
- AccumulationAfter a fall, the price moves sideways. Sellers have mostly given up, and buyers are in no hurry.
- MarkupThe price breaks out of the range upwards and makes higher highs and higher lows. Volume is usually heavier.
- DistributionThe price stalls near the top and moves sideways again. Those who bought cheaply sell to latecomers.
- MarkdownThe price breaks out of the range downwards and makes lower highs and lower lows.
Lessons are educational. They are not a recommendation to buy or sell. Investing involves risk and you can lose money. Sources: Dow theory as presented in John J. Murphy, Technical Analysis of the Financial Markets; the market cycle described by Richard Wyckoff; Stan Weinstein, Secrets for Profiting in Bull and Bear Markets (1988). The charts are teaching diagrams, not real prices.