Chapter 2 - Four Stages
The stock market’s a living thing. Waking up at the open. I believe it’s a lil’ rigged the way people can’t trade after hours, but accredited investors and firms can. Other assets are like the Flatbush, Brooklyn- never sleeping. They’re global, so someone’s always trading - even if they’re bots.
Markets might have some convinced otherwise, but I hold these two truths to be self-evident:
- Markets seek “fair value”. The poor timing of an unplanned trade isn’t a bug.
- There are no ‘good stocks’, only good trades. A business requires a business plan, so too does a trade require a strategy.
My notes on Chapter 2 of Technical Analysis Using Multiple Timeframes establish an understanding on the features of a market cycle and characteristics to look out for. Let’s begin.
Four Stages
Accumulation
Accumulation is but one point in the cycle. One thing to understand, any particular attention to order may misguide a trader. Rather than apply this logic, realize that you might observe an asset at any point in the cycle by nothing these key characteristics.
Accumulation is a neutral period marked by contraction of price ranges. There’s no edge for a trend trader, at this point.
Markup
By contrast, markup presents an opportunity. Buyers gain control, for one. Another feature to note, one observes a pattern of higher highs and higher lows. The path of least resistance is higher. In a bull market, the investment ideas would trade long.
Distribution
Distribution follows a period of markup. Once buying demand exhausts itself, settlers become more aggressive, turning the market neutral once again. This contraction comes before the following period, decline.
Decline
When the third stage lows break, price expands down seeking demand for the aggressive supply. Lower highs and lower lows indicate a bear market. Here, the trade idea sells short.
Concerning the market cycle, the four stages on all time timeframes, in all assets. “Fractal” properties are also observed within markets. The term fractal suggests rough geometric shapes which can be divided into parts, each of which is approximately a reduced-size copy of the whole.
In short, sections of a price chart can appear like a whole one- these stages can be observed at any point, really.
I say “I’m on this Marathon,”
She asked me, “what does that mean?”
Stocks, tokens, coins- they have personalities, just like you and me. Some are sprinters. These big bursts of energy, they zip for a bit. Others are runners. A steady, even-keel pace, they run on and on like a marathon.
Brian Shannon compares the price charts to heart rate monitors for these assets. The monitor measures exertion of a runner’s heart- as the chart checks the pulse of price.
Stocks alternate between periods of trending (expansion of range) activity present in stages 2 and 4 and period of consolidation (contraction of volatility) during stages 1 and 3. Go long in stage 2 and short in stage 4. I’d avoid the neutral 1 and 3.
Two terms worth an understanding are uptrends and downtrends. Uptrends are defined by higher highs and higher lows. Notable uptrends include the crypto bull runs of ‘17 and ‘21. Downtrends are defined by a series of lower highs and lower lows. Critics of crypto might cite the bear markets of ‘18 and ‘20 as times blockchain “failed.”
Proponents, opponents and the opportunistic often all forget the factor emotions play in speculation. Still, others often repeat blithely the cliche tips of the crafty sales brokers enticing laypersons to try their hand in the market.
Speculation requires cold, calculated actions. Those who guide their trades with an excitable hand are punished, often blaming the market for their shortcomings. I understood this all too well observing those close by, thus I reflect especially on emotion and cyclical analysis.
Emotional and Cyclical Analysis
The study of the market stages bets in psychology as it’s the differentiator between success and failure. Emotions reached all-time highs during the pandemic. Some made fortunes, others lost them casting their lot into investments while encouraged to remain at home. The World Health Organization named the disease COVID-19 on my birthday, February 11th, 2020. We did not celebrate as always. We found ourselves wrestling a new normalcy. Disbelief and panic won the day, while hope and optimism were in short supply. Rightfully so, as the stock market recorded its largest one-day point decline the 27th, 4.4% downward. Following several days of large falls, that was the worst week for the index, the Dow Jones Industrial Average, since 2008. It was not an uplifting week to turn 23 either. My experience is one marked and scored by crises, emotional and financial. March 12th, just three days before my father’s birthday, global stock markets crashed due to the pandemic and the U.S. travel ban on Europe. The worst losses for the index since 1987, left many people feeling stuck, as if things were going nowhere fast. More declines, topping even Black Monday in 1929, followed the Federal Reserve’s announcement to cut interest rates. It would not be now, but I’m sure this financial fear stoked the flame in my father to allocate funds to trade what online ‘experts’ convinced him was a “monumental” investment opportunity. I can’t tell if I had more disbelief than them in that moment or now, aware that little financial intuition and high-running emotion make a mean recipe for losses.
Knowledge may not inoculate from any disease, other than the common cold of ignorance, the easiest bug to catch, in my opinion.
Post Summary
- The four stages of a market cycle include: accumulation, markup, distribution and decline. Rather than thinking of them as beginning and ending, understand you might see a stock at any point in the cycle.
- Uptrends are marked by a series of higher highs and higher lows. Downtrends are marked by a series of lower highs and lower lows.
- Markets have psychology to the emotions of participants. Participants are inherently emotional, thus understanding them at various points in the cycle gives one a competitive edge.