Four Stages of the Stock Market 2 3416

To be successful every trader should learn to understand and identify, in what stage the trending is. Two of the four stages are relatively easy to identify, and the first and the fourth are the most difficult to spot as they are the blending of the bull and bear cycles. These four stages are repeated over and over again.

Any stocks, it has to be in one of the four stages and it applies to all time

  1. Pessimism
  2. Optimism
  3. Euphoria
  4. Fear
Nifty levels

Let’s see how it relates to our trading strategy, what each participant is doing at each stage, what to look for a chart and what the fundamentals are showing.

  1. Pessimism

Most of the investors who were in desperate need to sell have already done by losing the confidence at this stage and reluctant to invest in the stock market. This is a period when nobody wants to invest. So this stage comes after the Bull Run has ended. The public will not be back into the stocks until they reach higher prices. But this bargain prices marks this period as a period of accumulation by Institutions, lending money managers, professionals and value buyers. They may buy it for

  • Good fundamentals
  • Solid business strategy
  • Strong competitive positions
  • Improving earnings
  • Offer real potential for price appreciation
  • P/E ratio of the indexes are low
  • Good return on equity values

How to identify if it is in this stage?

  • When the stock stops hitting bottom price and starts moving to stage 2
  • It begins to break out of their sideways patterns
  • Isolated weekly and monthly highs occur as prices begin crossing their 100-day moving averages.
  • Low volatility

The price as the determining factor that indicates the end of the bear market and it is in the opening stage of the bull market.

“The whole secret to winning big in the stock market is not to be right all the time, but to lose the least amount possible when you’re wrong.”
– William J. O’Neil

  1. Optimism

With the market beginning to see potential for returns and investors begin to invest again as they regain confidence in the markets. It has been stable for a while and starts to climb up due to the actions of investors (mainly institutions) in the accumulation stage. It is the right time to buy the dips and ride the rallies higher; the uptrend in the market encourages the investors who do not want to miss out this potential growth resulting in additional market recovery or new highs. During this stage there will be some pull backs and corrections and it’s just normal for the market to take two steps in advance and one step back as it tries to advance with fewest people.

Accumulation is forcing for higher prices with reduced supply. Rallies are the results of a series of higher highs. Now, the market leaders are taking to the top and mutual fund inflows are increasing as a result of rallies. But still the larger public doesn’t join in the party keeping in mind that bull cycles take times to develop.

How to identify if it is in this stage?

  • Strong volume
  • A pause or pullbacks on a lighter volume
  • Breakouts above 150/200 day SMA
  • Long lap up on the breakout day

So, money is made after the correction, keep the stocks in watch list by doing your home work and own research. The best time to board on is the first pullback or pause after the breakout of the stage 1 and if it’s coming out of a correction, there could be a start of a long trend and it’s the right time to buy.

  1. Euphoria

At this stage, as the price hit their new highs, novice or inexperienced investors jump into the stock market believing that prices might go even higher. While some investors starts distributing their shares through selling, distribution is when the institutions that bought during stage 1 or early stage 2 are unloading their positions. Rest holds hoping it for the uptrend. Smart investors are ready to exit the stock.

How to identify if it is in this stage?

  • Stock loses momentum
  • starts to trade sideways
  • Price may oscillate above and below the 150/200 day SMA
  • Increase in volatility

Late stages are riskier so better take ½ profits at this point, but it could be just a pause before the next move up. During this period, prices will reach their highs, few investors hoping for a bull market rally to continue and feels comfortable investing in additional assets causing a period of higher volatility as prices fluctuate in either direction. So this is the right time to exit the stock.

  1. Fear

At the early stage, nobody believes this is the downtrend and they believe it’s just a correction and it will move up. Smart investors mostly have taken out their profits causing the prices to drop. As the decline continues, investors develop into panic/fear. Fear factors such as energy supply and prices, geopolitical risks, economic performance and emerging market environments all play a role in the daily fluctuation of market volatility. The investors holding losses slowly discover once again that what goes up must come down. Novice investors who are reluctant to sell have to book losses or turn to long term investor or begin to buy at the bottom out price restarting with a new period of accumulation.

During this time of higher volatility it increases the risk in your portfolio.  Any short term predictions at this higher volatility often leads to mistakes results in losses, making it really impossible to guess which way the market will trade.

How to identify if it is in this stage?

  • Lower lows and lower highs
  • Volume higher on the down days and lighter in the up days
  • Breaks below 150/200 day
  • Moving averages turn down
  • Stock or Market has broke down

Sometimes, late stage can work out and lead to gain but it involves more risk, quickly cut your losses when it breakout and fails to gain traction. If it breaks down with heavy volume and pulls back on light volume, it could be a shorting opportunity.

Every investors should be prepared for the unexpected and hold a diversified portfolio. Many makes it complicated and get lost. So all you need is to follow certain methods and discipline. By understanding the each stage of the market, they would be able to understand their investment strategy and make better decision when it comes to their portfolio.

Stay tuned to our next post “Stock Investing and Psychology”

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4 years ago

great insights!

Good Night 0 2261

I haven't slept alone in five years. I haven't woken up to sunshine and alarms.

Today when I have no choice but to get in bed all by myself, it feels like I have taken birth out of romanticism and forced to cuddle nightmares. Is this what loneliness feels like? I have no answers but I think this is what it is, I feel so small and lost. What if the stories about bloody Mary and the three thieves are true? Nobody will find me tomorrow and I will turn into mystery. What about the secrets and stories I haven't told anyone, will they disappear with me? My best friend will never know the truth about her boyfriend, that is sad.

Now I do not have to choose any side of the bed, it is all mine but incomplete. I will have to force myself to sleep and dream deep about togetherness and love, something I just lost. Will I wake up tomorrow with a hangover? I might gulp down a few glasses of beer and sing sad songs, a new happy place. I will be tagged as a melancholic mess. Ugh! its so quiet! Is this what poets keep reciting? This is not beautiful, it's chaotic. I do not see the moon, where did she go?

Were the stars hung up there to make way for rockets and spaceships? Will one crash over tonight? I’ll be gone then, So I will have to start all over among aliens and dodge UFOs? Okay… I need to get some sleep before the moonlight man knocks my bedroom door. Is he already watching me? Does he know I am all by myself? I can’t do this! I can’t! Wait am I too loud? Did he hear me? let’s sing a song! Yes! Uhmm “I got a ticket for the long way round, two bottles whiskey for the way…” Haha I remember how I played the cup song in school and screwed up,he was watching me from the backstage. I walked out half way the performance and he ran after me to calm me down, I had butterflies in my stomach. We were highschool sweethearts. Wait why am I blushing over this? No, it’s over and I don’t want to remember these moments. I should burn down these memories soon. Fire! I think I need to check the iron box, I smell something. It smells weird, I don’t know. Okay let’s breathe, easy peasy.

I will keep the fairy lights turned on and light music playing, uhm Ed Sheeran? Adele? let Coldplay play. Did I just say “play” twice? Wow play, say, hey, may… May? So he’s not going to be there for my birthday this time, I think I will feel hollow. I already do. Shut up! I talk too much. I am on my bed, let me close my eyes, I see colors. No just black actually.

Has it been an hour already? Wait why is it dark? Where am I? Am I trapped in a dream?

Okay now it’s 3 AM, almost there. I want hot chocolate and cookies, my stomach’s growling. Midnight craving after all. So this is what sleeping alone feels like? I hate it. Guess I will never sleep at this rate. Let’s try the old way that my aunt taught me, I will count sheep. One sheep, two sheep, three sheep..

I stretch and rub my eyes, I finally saw the sunshine.

Written By
Manasvi Bendigeri

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