The Four Stages of a Stock Market Cycle

A stock market cycle is very similiar to a business or economic cycle which consists of:

1. Expansion
2. Peak
3. Decline
4. Recovery

To trade stocks successfully, you must first understand the four stock market stages that individual stocks and the overall market go through.

These cycles tell you if you should be long, short or in cash. Once you are able to identify what stage it is in, you can then trade accordingly to those characteristics.

After a while you won’t even have to think about whether you should be long or short. You will know, without question, exactly what you should be doing NOW. You will either be focusing on long positions, short positions, or you will stay safely in cash – just by glancing at a chart!

Four Stages of a Stock Market Cycle

In the case of a stock market cycle we have the following four stages:

1. Accumulation: After a period of decline or correction, stocks go through a period of accumulation. During this stage bulls & bears fight it out with each other  to take control of the trend. Stocks change hands without any noticable change in trend. This is a sideways phase and does not really provide any sizable trading opportunity.
2. Markup: During this stage the bulls wrest control of the stock from the bears and the stock goes into a new uptrend. Stocks pick up speed and momentum. This is the most profitable stage for a trader as maximum profits can be extracted during this stage trading on the long side. Stocks make a series of higher highs and higher lows and a new bull market begins.
3. Distribution: After the glorious bull market in stage two, markets get exhausted and pauses its uptrend. Smart money (professionals) who bought earlier are now selling to the amatuers. Stocks and markets just drift along sideways without any discernable trend and does not provide any profitable trading opportunity.
4. Decline: After the professionals have dumped their holdings on to the amatuers during the distribution stage there are no more buyers left. The lack of buying by buyers and aggressive supply by sellers leads to a sharp fall in prices and a bear market. During this stage stocks make lower lows and lower highs. This again is a very profitable stage for traders. The sharp decline in prices with momentum provides excellent trading opportunity to a trader.

Stock market stages occur in all time frames on every chart you look at. This could be a five minute chart of Nifty or a weekly chart of the ACC.

Trading Strategy
Generally, you want to stay in cash when a stock (or the market itself) is chopping around in a stage one. In stage two you will want to be aggressively focusing on long positions. In stage three you want to be in cash. In stage four you want to be aggressively focusing on short positions.