🌊 Market Phases & Dow Theory

The 4 Wyckoff phases, the 6 Dow tenets, trend structure, recognition rules and strategy mapping.

Cheatsheet As of: 09/2026

🎭 The 4 Market Phases (Wyckoff Cycle) A → M → D → M

Phase 1

🟢 Accumulation

Smart money accumulates

Sideways range after a low. Volume declines, pullbacks on low volume. "Spring" shake-out.

💡 Cautiously long · Short Puts · small size

Phase 2

📈 Markup

Trend unfolds

Higher highs + higher lows. Volume rises with the trend, pullbacks are shallow and brief.

💡 Trend following · Long Calls · Bull Call Spreads

Phase 3

🔴 Distribution

Smart money distributes

Sideways range at top. "Upthrust" false breakouts. Volume rises on pullbacks — opposite of accumulation.

💡 Lock in gains · Collars · Covered Calls · Hedges

Phase 4

📉 Markdown

Downtrend

Lower lows + lower highs. Rallies are short-lived "dead cat bounces". Fast & painful.

💡 Bear Put Spreads · Long Puts · Hold cash

📜 The 6 Tenets of Dow Theory Charles Dow, from 1882

TENET 1

📊 Markets discount everything

All information is already priced in. You need no informational edge — the price IS the information.

TENET 2

🌊 Three trend tiers

Primary (tide, months–years), Secondary (waves, 3W–3M), Minor (ripples, days).

TENET 3

🎭 Trends have 3 phases

Accumulation → Public Participation → Distribution. Buyers in phase 3 are the exit liquidity.

TENET 4

🔗 Indices confirm each other

Industrials + Transportation must make new highs. Modern: S&P + Small Caps + Semis.

TENET 5

📢 Volume confirms

Volume rises in trend direction, falls against the trend. Breakout without volume = fake-out.

TENET 6

🛡️ Trend persists until reversal

HH/HL stays HH/HL until a significant low breaks. Pullback ≠ reversal.

🏗️ Trend Structure (HH/HL)

Pattern	Meaning
HH + HL	Uptrend intact
LH + HL	Undecided Triangle
HH + LL	Expanding Volatile
LH + LL	Downtrend intact

🪜 Staircase rule: Trend = staircase. Each step: higher landing (high) + higher platform (low). Platform collapses → trend wobbling.

⚙️ Quick Recognition

SMA order	Phase
Price > SMA20 > 50 > 200	Markup
SMAs intertwined	Accum / Distri
Price < SMA20 < 50 < 200	Markdown

ADX value	Trend strength
< 20	Range — Mean Reversion
20–25	Early — Wait
25–40	Solid — Trend following
> 40	Extreme — Lock in gains

🎯 Strategy Mapping per Market Phase Quick Reference

Phase	Market outlook	Best option strategies	Avoid
🟢 Accumulation	slightly bullish	Short Put (cash-secured), Wheel setup, Long Call cautiously	Bear spreads, large Long Calls
📈 Markup	bullish	Long Call, Bull Call Spread, Call Calendar, Covered Call OTM	Short Strangles (gamma risk), Iron Condors
🔴 Distribution	neutral / topping	Collar, Covered Call ATM, Bear Call Spread, first Long Puts	Naked Calls, aggressive Long Calls
📉 Markdown	bearish	Long Put, Bear Put Spread, Put Calendar, Protective Put	Cash-Secured Puts (falling knife!), Bull Spreads
↔️ Range (ADX<20)	sideways	Iron Condor, Short Strangle, Short Straddle, Butterfly	Trend-following strategies, breakout buys

🧠 Mnemonics & Memory Aids 8 Rules

🔔 Shoeshine Boy rule When taxi drivers give stock tips → Phase III. Smart money sells to the crowd. Time for hedges.

🌊 Dow sea Primary = tide · Secondary = waves · Minor = ripples. Don't chase the ripple — ride the tide.

🎭 A-M-D-M Accumulate → Mark up → Distribute → Mark down. The eternal cycle in four syllables.

⚖️ Index handshake Index rising but Small Caps / Transportation not confirming? No clean trend — the market is lying.

📢 Volume = lie detector No volume = no conviction. Breakout without volume is a fake-out in waiting.

🛡️ Innocent until disproved Pullback ≠ reversal. The trend is dead only after the low breaks. Don't sell before that.

🪜 Staircase rule Uptrend = higher landings + higher platforms. Stay on the staircase as long as it rises in step.

🎯 Phase before strategy Identify the phase first, then choose the strategy. Iron Condor in Markup = costly tuition.

💡 Golden rule: Trade with the primary trend, not against it. The higher timeframe (Weekly) dominates. A secondary pullback on the Daily is not a reversal signal if the Weekly still shows HH/HL.