What are the Different Market Cycles

The stock market tends to move in cycles. It goes up and sometimes it goes down reacting to every economic fundamentals or news you can think of. That is why it is quite hard to understand how it behaves. Its very sensitive to every aspect you can think of.

See the arrows indicated on PSEI or blue chip index of our market. Predictability is very hard, that is why most will get shaken out during this market cycles.

A cycle determines the life expectancy of a market that we are in and as it completes the several phases of going up, down, sideways and bottoming out and later repeating this movement

As a trader or investor in the market, knowing the overall picture of its movement will tell us if it is already time to enter or exit the market

1. Accumulation

This is the stage of the market where the price action is just moving in the sideways. If you are not yet familiar with the trend movement of a stock you can check our previous discussions on Stock Trend Directions. Market participants or simply the retailers like us do not notice the stock at this stage of the market. As I have mentioned we cannot earn from a stock if its price is not moving up significantly. So those stocks in sideway tend to be out of everybody’s sight This stage of the market cycle is normally ignored by general market participants.

For the example chart below, before the massive move of ACEN took place last year 2020, the market prices stood in a sideways direction for 81 days or almost 3 months. For this length of time, most traders will not look at the stock. There were not much selling volume (bars below the candles) anymore from the half of February to the half of March. 2 weeks before April you can see sudden up tick now in volume and prices start to move accordingly

The above photo of APL (Apollo Global Capital) shows the prices took a long sleep for 1,316 days before suddenly exploded due to speculations on its offshore mining activities.

But unknowingly to us, under the right conditions, this is when big boys or those with large funds are starting to accumulate. It could be that the stock have drop significantly before such that investing public ignores increase in transaction volumes because the price is not moving upward.

This stage also could take up to 2-6 months depending on how those large funds intend to accumulate. You can also notice that the price action no longer have lower lows or lower highs formation. And then suddenly when the overall market conditions, the upward movement becomes noticeable and our next stage is set to move.

Note for those who have sitting power and can hold stocks this long tend to get much of the gains as this is the base of the price before it starts to move significantly.

2. Mark Up

As mentioned when market conditions start to improve, good news start to fill up a certain stock. In the Philippine context, most of the known local news producer tend to have the same topic at the same time. This fuels market speculation and when there is a sudden breakout in price from accumulation stage, the investing public start to notice also the upward movement of the stock.

The longer the accumulation stage is the more explosive the stock breakout. For about few days, you can start to see significant upsurge in volume already such that retailers or common traders can easily visualize what’s happening.

This stage is also the start of an uptrend movement of a stock. Recall that it is not a straight upward movement but rather zigzag upward thrust with high volumes every time the stock recovers from its lows. We can then also notice higher-highs (H) and higher lows (L) formation. Check our article in trend directions for you to properly identify these markings on the chart

Under this stage also, stock market forums, facebook pages and groups start conversing about the stock, there will then be more buyers at this stage. You can see comments such as “to the moon”, “pamana stock” and such.

Big green candles with volume during these stage is visible. At this stage 5% to 10% upsurge in prices is normal. Panic buying can be seen also during this time.

3. Distribution

This is the stage when after successive series of higher highs were formed already and then suddenly the stock price could not advance. In some cases the succession of higher highs and higher lows take a rest for a while as some strong stocks tend to exhibit.

The duration of the distribution can took many months as well, check the example below of distribution for LTG Group incorporated. This took some time from November 2020, July 2021.

More buyers volume can be seen during this time, but the price action could not continue further. This is because the large funds who have acquired large number of shares during the accumulation stage start to unload most of their shares.

The selling is not done one time but in successions. Every time the price starts to move, large volumes tend to come out.

This stage is difficult to assess at this time because it behaves differently if the stock is still bullish. It could further increase in price action later on if the stock continues its good news, investors tend to return back when a stock still has a growth potential.

Look at the chart below of Wilcon, there are 2 stages of distribution that occurred but it managed to continue its uptrend movement after investors came back again.

Distribution tend to look like an accumulation stage at the top. No more new highs are form.

4. Mark Down

When the big fund managers are able to distribute their shares during the distribution stage, you can suddenly notice that the volume transaction for the coming few days appears dry. There are fewer buyers now and sellers start to pile up with big red candles suddenly coming out

The support of the seemingly long sideways price movement at the top start to break down with a big volume coming out. This now is the starting point of the mark down.

Succeeding days shows the same scenario with more sellers and lesser buyers volume. In most cases you will see a formation of lower lows and lower highs. In extreme pessimism on market, big long red candles every day will come out with losing percentages occurring more than 10% per day.

Traders are mostly trap on these sudden down surge of prices and tend to not be able to react and wait for the selling to stop. After few days the downward move continues and anyone holding a large quantity of shares during this time will tend to sell as well.

Panic selling is normal during stage

At some point you will see big institutions selling also their final shares in preparation of catching the shares at the next bottom and the next cycle starts to begin again after selling stops for quite some time.

This market cycles tend to continue over time, so knowing which stage you are in the market so next time we can react fast enough not to get trap in these cycles. There are instances that the overall market cycle trend is happening but the price keep going down so be careful always on what stock you are buying.

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There are 3 different trend directions that we can see in the market, Uptrend, downtrend or sideways direction. This is very important basic requirement to understand as it will give us a sense of direction where the overall price action is moving.

To the untrained eyes the stocks share price seems to move in random direction as it is consist of series of candles for each day of trading. See sample below for a price action of a stock called DMC.

Uptrend

The market for a certain stock or share prices is moving upward in this direction. It is characterized by a series of higher highs and higher lows formation. Let me illustrate this so we can understand the terminologies that we are using.

This picture of the Philippine stock exchange index (PSEI) is consist of candle sticks from day to day trading. One candle is added to the charts each day that we have activity in the market.

When I draw a straight line to show the overall  candle movement we can see that  its direction we can easily view that the trend of the candles is moving upward. So this is an example of an uptrend stock. For trading and investing in the market this is what we normally want to see so that when we buy we could expect a price appreciation which in turn would give as gains or profits on the market.

However, if you try to inspect carefully the candles are not moving in a straight line but rather we can see a series of zigzag lines going up and down, once I draw a line just following how the candles move we can see the zigzag movement

Now from the above picture I have mark the peaks of each cycle a candle is having. A letter “H” is indicated when it’s in peak position and “L” if it goes down and later rebounded back. This is what I meant when I said the uptrend cycle is consist of Highs (H) going higher in position and its lows (L) having a higher position.  An uptrend stocks is also called a bullish stock.

Downtrend

On the opposite side if the trend direction of the chart is going down and it has a series of lower highs (H) and lower lows (L) this is a downtrend direction. You can draw a straight line first following overall candle movement and then later trace the candle movement just like what we did above

Downtrend Series of lower highs and lower lows. The set of highs and lows can be seen cascading in downward direction

Sideways

We can see this pattern when the definition of series of highs and lows could not be seen properly and overall picture the chart candles are showing are moving neither up nor down

Here you can see the highs are going down but the lows side are not going up or down.

Traders rely on the graphical interpretation of how the chart is moving so we know that we have a high chance of winning the trade if it moves in our direction. As I have mentioned in Philippine trading, you can only have price appreciation or gains in the market if you are in uptrend direction. So for most cases to maximize profit we need to stay only when we have uptrend direction. The plotting done showing zigzag patterns will easily tell us when the market trend is shifting so we can react accordingly.

In some cases  the market trend does not follow the 3 different directions that we have classified. In the classification of stocks known as “penny” category as the prices are on the low range of prices (below 1 peso) with low market capitalizations you can expect to see sudden up move or down move only. These stocks are difficult to trade because the prices action is controlled by emotions and not by normal trend directions.

We will later have discussions for this type of stocks.

Here is the video explaining the trend directions