On a long-term chart 4 Stages Of Stock Market Cycle are
- Accumulation
- Uptrend
- Distribution
- Downtrend.
As a full cycle plays out from the lows to the highs and back down, all markets eventually go through all four of these phases.
4 Stages Of Stock Market Cycle
Phase of Accumulation
Accumulation occurs after the market has reached a bottom, and value investors and dip buyers begin to buy after the low has been reached, both believing that the worst is over. The low price of stocks versus the fundamental value of the companies appeals to value investors, and traders buy the dip based on oversold technical readings on the chart. During this stage, the primary emotion is hope.
Phase of an Uptrend
During the markup phase, charts begin to make higher highs and lower lows. This happens after the market establishes a low price and holds it for a period of time before breaking out over resistance and moving higher in price. This is the stage at which growth investors become interested in purchasing companies that have the potential to become new market leaders based on revenue and products, momentum traders purchase technical breakouts, and trend traders begin trading the long side of the chart. During this stage, the dominant emotion is greed.
Phase of Distribution
When sellers take profits and charts fail to make new higher highs, the distribution phase begins. Profit taking reigns supreme during this stage of the cycle, as charts reach their apex and bearish chart patterns such as the Head and Shoulders or a Double Top form. During this stage, doubt is the major fear.
Phase of the Downtrend
The downtrend phase occurs when the price on the chart makes lower highs and lower lows as a result of constant selling pressure. This is the stage at which stop losses are triggered, causing prices to fall further and further, and rallies fail to go higher and are used as selling opportunities for holders. During this stage, the dominant emotion is fear.
Cycle of the Stock Market
To understand the best strategy to use, you must first understand what stage of the market you are trading in.
Fundamental trading strategies:
- During the accumulation and distribution phases of a rangebound market, buy support and short resistance.
- In an uptrend, buy pullbacks and breakouts.
- In a downtrend, short rallies and breakdowns are common.
Also Read