Chuck Dukas Market Phases of Trends (based on 2 Moving Averages)

6월 6일

This script is based on the article “Defining The Bull And The Bear” by Chuck Duckas, published in Stocks & Commodities V. 25:13 (14-22); (S&C Bonus Issue, 2007).

The article “Defining The Bull And The Bear” discusses the concepts of “bullish” and “bearish” in relation to the price behavior of financial instruments. Chuck Dukas explains the importance of analyzing price trends and provides a framework for categorizing price activity into six phases. These phases, including recovery, accumulation, bullish, warning, distribution, and bearish, help to assess the quality of the price structure and guide decision-making in trading. Moving averages are used as tools for determining the context preceding the current price action, and the slope of a moving average is seen as an indicator of trend and price phase analysis.

The six phases of trends

Pine Script®

1. Recovery Phase: This phase marks the beginning of a new trend after a period of consolidation or downtrend. It is characterized by the gradual increase in prices as the market starts to recover from previous losses.
   
2. Accumulation Phase: In this phase, the market continues to build a base as prices stabilize before making a significant move. It is a period of consolidation where buying and selling are balanced.
   
3. Bullish Phase: The bullish phase indicates a strong upward trend in prices with higher highs and higher lows. It is a period of optimism and positive sentiment in the market.
   
4. Warning Phase: This phase occurs when the bullish trend starts to show signs of weakness or exhaustion. It serves as a cautionary signal to traders and investors that a potential reversal or correction may be imminent.
   
5. Distribution Phase: The distribution phase is characterized by the market topping out as selling pressure increases. It is a period where supply exceeds demand, leading to a potential shift in trend direction.
   
6. Bearish Phase: The bearish phase signifies a strong downward trend in prices with lower lows and lower highs. It is a period of pessimism and negative sentiment in the market.
   

These rules of the six phases outline the cyclical nature of market trends and provide traders with a framework for understanding and analyzing price behavior to make informed trading decisions based on the current market phase.

60-period channel
The 60-period channel should be applied differently in each phase of the market cycle.

1. Recovery Phase: In this phase, the 60-period channel can help identify the beginning of a potential uptrend as price stabilizes or improves. Traders can look for new highs frequently in the 60-period channel to confirm the trend initiation or continuation.
   
2. Accumulation Phase: During the accumulation phase, the 60-period channel can highlight that the current price is sufficiently strong to be above recent price and longer-term price. Traders may observe new highs frequently in the 60-period channel as the slope of the 50-period moving average (SMA) trends upwards while the 200-period moving average (SMA) slope is losing its downward slope.
   
3. Bullish Phase: In the bullish phase, the 60-period channel showing a series of higher highs is crucial for confirming the uptrend. Additionally, traders should observe an upward-sloping 50-period SMA above an upward-sloping 200-period SMA for further validation of the bullish phase.
   
4. Warning Phase: When in the warning phase, the 60-period channel can provide insights into whether the current price is weaker than recent prices. Traders should pay attention to the relationship between the price close, the 50-period SMA, and the 200-period SMA to gauge the strength of the phase.
   
5. Distribution Phase: In the distribution phase, traders should look for new lows frequently in the 60-period channel, hinting at a weakening trend. It is crucial to observe that the 50-period SMA is still above the 200-period SMA in this phase.
   
6. Bearish Phase: Lastly, in the bearish phase, the 60-period channel reflecting a series of lower lows confirms the downtrend. Traders should also note that the price close is below both the 50-period SMA and the 200-period SMA, with the relationship of the 50-period SMA being less than the 200-period SMA.
   

By carefully analyzing the 60-period channel in each phase, traders can better understand market trends and make informed decisions regarding their investments.