The Four Market Stages That ALL Markets Go Through

Once you are able to identify what stage the market(s) are in, you can then trade according 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!

The side illustration is of the four stages that stocks (and ALL markets) go through. This happens in all time frames whether it is a monthly chart, weekly chart, daily chart, 

or an intraday chart.

In other words, fractals, which is the never ending pattern of the monthly chart "containing" the weekly chart, the weekly chart "containing" the daily chart, the daily chart "containing" the hourly chart, which "contains" the 15 minute chart, etc..

This is a simple, symmetrical bell curve representing the distribution of data points and, 

in this particular case, is being applied to market behavior.

Take a look at the chart on the Home Page - it could be a stock, commodity, currency, etc., but it is clearly transitioning from Stage 2 (Uptrend) to Stage 3 (Distribution) to Stage 4 (Downtrend).  

It doesn't matter what underlying market is involved (or what time frame chart we're looking at), the Stages are almost constant!

This is how the "Smart Money" manipulate the markets - they've been doing this forever!

Side Note:

If you make trading the stock (or commodity, bond and / or currency) markets too complicated, then it is just not worth doing.  

The following information is meant to simply explain how to keep a trader  / investor on the proper side of the market - the "how to" as far as actually profitably executing, monitoring and exiting trades is where an experienced Advisory Service comes into the picture.

To trade profitably, once the set-up is apparent, action is taken quickly & decisively, otherwise the opportunity "slips" away.

When it comes to the markets: 

"What you don't know could hurt you VERY much!"

You will learn from reading below that the markets are far from random, that they move within an almost musical symmetry and flow - yes - the smaller "ebbs & flows" within the main price moves can appear random, as much of the market "noise" is, but the overall movement has "method" behind it.

Let's take a look at the characteristics of the four stock market stages:

Stage 1 is the stage right after a prolonged downtrend. This stock has been going down but now it is starting to trade sideways forming a base (Accumulation Stage). The sellers who once had the upper hand are now beginning to lose their power because of the buyers starting to get more aggressive. The stock just drifts sideways, with very little activity / volatility - without a clear trend. 

During this stage, it is very important to see low volume in a well defined sideways channel with an occasional volume "blip" here and there.  The diminishing selling by the big players is reflected in the lower selling volume.

Everyone hates this stock!

This is known as the Accumulation Phase (Stage 1), where the “Smart Money” (the 10% of professional traders) are quietly accumulating (purchasing) their stocks (inventory).  

Who is the "Smart Money"?

The Institutions: 

The Big Banks, Insurance Companies, Hedge & Pension Funds, Mutual Funds, Sovereign Wealth Funds as well as very experienced traders - essentially all of the deep pocketed, 

big money traders and investors.

The smart money must do their buying slowly & gradually in order to not drive prices higher too quickly, that is, until they have absorbed most of the existing supply 

(the smart money's subtle way of "cornering the market").

This accumulation stage can last anywhere from several weeks to many months and is marked by low volume and boring price movement, "marching" sideways within a well defined  channel.

Finally stocks break out of the sideways channel into Stage 2, which begins the uptrend 

(Mark Up / Bull Stage). 

This is where the majority of the money is made in the stock market. 

With many years of study & experience, you are able to observe - in real time - the market change / transition  from bearish - to sideways - to BULLISH - time and time again!

It's at this time that the ("insider") market participants see that price is currently far below (perceived) value and that price needs to move up (over time) in order to once again become "efficient", that is, that price & perceived value, once again, align.

As the stock(s) break out of the sideways channel, it is ESSENTIAL that the breakout occurs on high trading volume to be proven authentic. 

Since this is usually quite subtle, the public (90%) is still not paying any attention.

As prices continue to climb, the TV talking heads are starting to perk up and the public is starting to cautiously pay more attention – and some are even beginning to buy into this developing Bull Market.

Eventually things get frenzied – everyone is buying and everyone is talking about a market that’s headed for the moon! 

Now, we’ve entered the “glorious” Mark Up Phase (Stage 2), which is also known as a Bull Market.  

Now more and more people are buying and trading volume is increasing as prices are increasing - this is EXTREMELY important!   

Also, continued Institutional buying is helping to propel this bull move like "rocket fuel"!

This can be seen by massive, sustained buying volume.

Keep in mind, the Institutions / Smart Money are investing tens of millions of dollars and must do their (continued) buying over days and more often, weeks during the bull market.

The bull market will move up in waves (impulsive on the buy side and corrective on the sell side - with corresponding volume).  Learning to "ride these price waves" properly, is how the money is made consistently.  It's as simple as learning a new language - the charts tell you all you need to know, once you become "fluent".

Of course, using an Advisory Service that does only this also helps.

One must understand that the media "hype" begins slowly and builds with time 

(during the bull market).  There is a lot of interest & money underlying the extent of the media "hype", depending on the specific situation / company or companies involved.

But here is the funny thing: 

No one initially believes the rally! 

That's right, everyone still hates the stock. The fundamentals are bad, the outlook is negative, etc. But professional traders know better. They have been accumulating shares since early in Stage 1, as well as all during the up move / bull market and are now are getting ready to dump those shares off on those getting in late (the 90% unsuspecting public).  

This sets up stage 3.

Finally, after the glorious advance of stage 2, the stock begins to trade sideways again and starts to "churn" (Distribution Stage). 

Novice traders are just now getting in! 

This stage is very similar to stage 1, however with much more price volatility & a much wider, sloppy sideways channel.

As this happens we begin the top of the bell curve, known as the Distribution Phase (Stage 3), where, as mentioned above, the professional 10% are quietly selling / distributing (unloading) their previously purchased shares to the unsuspecting public (90%).  

Buyers and sellers move into equilibrium again and the stock just drifts along, however with considerably more volatility than it did in Stage One.  Prices become choppy & volatile and usually move sideways in a wide, "sloppy" channel.   The diminishing buying by the big players is reflected in the lower buying volume.

With many years of study & experience, you are able to observe - in real time - the market change / transition from bullish - to sideways - to BEARISH - time and time again!  

It's at this time that the ("insider") market participants see that price is currently far above (perceived) value and that price needs to move down (over time) in order to once again become "efficient", that is, that price & perceived value, once again, align. 

This distribution stage can last anywhere from several weeks to many months and is well known (by the professionals) to witness VERY volatile price action as shares trade hands from the strong handed sellers (10%) to the weak handed buyers (90% unsuspecting public).

Once again, now, the 10% (seasoned / consistent winning traders & investors) are quietly beginning to sell (Distribute) the shares they had purchased back at the beginning of Stage 1 as well as during this Stage 2 Bull Market, while reaping huge profits.  

Who, you might ask, has been  buying from them at the worst possible time???

You guessed it – the 90% of the (uninformed) frenzied buying public.  That’s right, now everyone in the public is buying as many shares as possible (usually exactly at the wrong time)!

In addition, the 10% professional traders are now shorting shares to make profits on the future price decreases during Stage Four!

It is now ready to begin the next stage.

This is the dreaded downtrend for those that are long this stock. (Mark Down / Bear Stage). 

But, here is the funny thing: 

Nobody believes the downtrend! The fundamentals are probably still very good and everyone still loves this stock. 

They think the downtrend is just a "correction". Wrong! They hold and hold and hold, hoping it will reverse back up again. 

At this point, more and more people are beginning to sell their previously purchased stocks, bonds, commodities, currencies, etc., however the majority will hold on and hope and pray for prices to reverse upward once again.  

The bear market will move down in waves (impulsive on the sell side and corrective on the buy side - with corresponding volume).  Learning to "ride these price waves" properly, is how the money is made consistently.   It's as simple as learning a new language - the charts tell you all you need to know, once you become "fluent".

Of course, using an Advisory Service that does only this also helps. 

Also, continued Institutional selling is helping to propel this bear move like "rocket fuel"!

This can be seen by massive, sustained selling volume.

Keep in mind, the Institutions / Smart Money are now liquidating previously purchased positions and re-investing (in short positions) tens of millions of dollars and must do their selling over days and sometimes, weeks during the bear market, although the climactic selling (massive fear of continued losses by the public) can occur quickly, as this fear dominates and late buyers "throw-in-the-towel" for big losses.

As far as the public (90%) is concerned, since fear is the stronger emotion than greed, markets typically fall (Stage 4) MUCH faster than they rise (Stage 2).

All of the financial talking heads are saying “grab these great bargains” as the prices continue to fall.  Those that listen to them, intensify their losses!

Most of these (90% unaware public) traders / investors probably bought at the end of Stage 2 or during Stage 3. 

Sorry, you lose. Checkmate!

Side Note #1:

If the stock is failing to make new high prices while the news is still very good - take the hint - you're probably in late Stage 3 or early Stage 4.

Side Note #2: 

As a trader (or investor), once you start trading on emotions, it's just easier to flush your money down the toilet!

A favorite quote from Al Rizzo:

"When a falling stock becomes a screaming buy because it cannot conceivably drop further, try to buy it thirty percent lower." 

Eventually later (many times months and sometimes years later), market prices begin to stabilize (form a base) and we begin the Accumulation Phase (Stage 1) all over again, where the “smart money” (10% professional traders) are quietly accumulating (purchasing) their stocks (inventory).  

Many times, it takes a good deal of time as well as the transfer back & forth of money & market sentiment to "reset" the market, momentum & public perception, but the entire cycle almost always occurs repeatedly.

AGAIN, IT CANNOT BE EMPHASIZED ENOUGH THAT THIS CYCLE REPEATS TIME AND TIME AND TIME AGAIN!

Stock market stages occur in all time frames on every chart you look at. This could be a five minute chart of Microsoft or a weekly chart of the Dow or a monthly chart of the soybean market – it makes no difference!

Generally speaking:

You want to stay in cash when a stock (or the market itself) is chopping around in Stage one (Accumulation). 

In Stage two (Mark Up / Bull) you will want to be aggressively focusing on long positions. 

In Stage three (Distribution), you want to be in cash. 

In Stage four (Mark Down / Bear), you want to be aggressively focusing on short positions.

That's all there is to it:

Trading with the four stock market stages is comparatively simple when viewed properly!  

MOST OF THE “GUESSWORK” IS REMOVED AND YOU ARE FREE TO PROFITABLY TRADE WITH THE CURRENT TREND!

Two rules for investing/trading:

Rule number one : most things will prove to be cyclical

Rule number two : some of the greatest opportunities for
gain and loss come when other people forget rule number one 

-Howard Marks

The above information is meant to simply explain how to keep a trader  / investor on the proper side of the market - the "how to" as far as actually profitably executing, monitoring and exiting trades is where an experienced Advisory Service comes into the picture.

To trade profitably, once the set-up is apparent, action is taken quickly & decisively, otherwise the opportunity "slips" away.

Once again, it's important to remember, when it comes to the markets: 

"What you don't know could hurt you VERY much!"

In other words:

Focus on which stage the chart is indicating that the market is in
          (Stages 1, 2, 3 or 4) so that you can trade without Diversions
            from the financial news, etc.  

If you want to lose money in the markets, just listen to the "experts" on the financial news channels - they will all but guarantee that you will make poor investment choices over time.  

They have an agenda / paycheck to protect - believe us - they're not looking out for your financial well being!

You must be able to "cut-through-the-noise" and there is a lot of it - some deliberately designed to distract and confuse, some just occurring randomly - either way - you must avoid letting the "noise" influence your behavior / trading method.

Remember, the charts have NO AGENDA / ulterior motives: 

they simply show things as they truly are!

Important Note:
Never confuse simplicity with lack of sophistication.
 

Occam's razor: 

When presented with both a complex solution to a situation
and / or
a simple solution to a situation -

MOST OF THE TIME - THE SIMPLE SOLUTION IS THE ONE THAT WORKS BEST!!!

Simplicity in process {the trading process} has made {and will continue to make} phenomenal amounts of money in the markets from very simple decisions that experienced traders are willing to make.  

Do NOT fear uncertainty - embrace it, as it will always exist -
because by the time the trader is certain of something -
the price move / opportunity will have already slipped away!

Many are looking for highly complex ways of interacting with the markets,
when most of the time it's only the simple ones that are going to work!

For related information:

Please visit the "Why Only 10% Succeed" Page

Risk Management is an essential component of Trading - 

for more details on this important subject:

Trader Screen Stock & Commodity Overview Report

 In Addition (regarding the very important subject of risk):

Asymmetric Leverage must always be employed.

Asymmetric Leverage is the attempt to profit from the potential upside of leveraged trading with very limited downside risk -- that's the key to trading longevity! 

For more information on Leveraged Trading:

Types-of-Risk

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