Up and Down we go, Understanding Market Styles

There are good times and bad times to put your money into the market. Understanding that timing could be the difference between growing your account or losing it all.

There are four main cycles:

Accumulation

The S&P 500 entered into the accumulation phase

This is the phase when a stock has reached a significant sell-off period and there are no more sellers. The price of the stock will move horizontal for a period of time as any news is already priced into the price.

This is a trendless period of buying shares, mostly by institutions as they get into the stock at rock-bottom prices. During this time, there is no catalyst. As a trend trader, we want to stay away during this cycle, but still keeping tabs on the stock because once it breaks from the accumulation phase it enters into the run-up stage.

Run-Up

The S&P 500 comes out of accumulation and begins a run-up

This is the stage in the market cycle when everything is going up; dips are swallowed by bullish buyers and the “rising tide lifts all boats.” This is the sweet spot for swing traders, as breakout trades work best.

Distribution

The S&P 500 enters the distribution phase after the run-up

Once the trend breaks, the market will enter a distribution phase of big up days and big down days. Sellers are reducing their positions taking profits as the market reaches new highs. The distribution phase is another trend-less cycle and one we want to avoid as well.

Run-Down

The S&P 500 enters the run-down phase before returning again to accumulation and repeating the cycles.

The final stage of the market cycle is the run-down. This is when supply outpaces demand and sellers need to lower their price to find buyers. Moving averages start to turn and the market dips.

It is important to note that during the phase, good money can be made on shorting. When the market goes down, it goes down fast and hard, meaning if you play it correctly, you can make much more money than during the run-up phase.


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