Is it possible to time the market cycle to capture big gains?…Academics claim it’s not possible, while traders and chartists swear by the idea. That said… the better an investor can identify the phases of a market cycle, the more profits can be made on the ride upwards of a buying opportunity. The following infographic explains the 4 important phases of market trends, based on the methodology of the famous stock market authority Richard Wyckoff.
Here are the descriptions of each major phase of the market cycle [as illustrated in the infographic below]:
- Accumulation: Occurs after a drop in prices. Process of buyers gaining control from sellers which leads to markup.
- Markup: Bullish phase of a stock’s life is defined by higher highs and higher lows. This is where you want to get long on breakouts and after short-term pullbacks. Rallies are “innocent until proven guilty”.
- Distribution: Occurs after a prolonged price advance. Sellers gain control of prices, which leads to decline.
- Decline: Bearish phase of a stock’s life. This is where you want to be short, so look to sell short fresh breakdowns after minor rallies have exhausted themselves. Rally attempts are “guilty until proven innocent”.
The basic strategy is to pay close attention during the accumulation and distribution phases as the market shifts from buyers to sellers, or vice versa. Then, by recognizing the markup and decline phases, an investor can be appropriately long or short to make solid returns.