The Four Phases

The four phases
Cycles in all aspects of life. They range from very short notice, as the life cycle of a June-bug, which lives only a few days to the life cycle of a planet, the billions of years.

No matter what market you are referring to, all have similar characteristics and through the same stages. All markets are cyclical. They go, peak, go down and then below. If a cycle is completed, the next begins.

The problem is that most investors and traders either not to recognise that the markets are cyclical or forget to wait until the end of the current phase market. Another major challenge is that, even if you accept the existence of cycles, it is almost impossible, to the upper or lower range. But an understanding of cycles is essential if you want to maximize investment and trade again. Here are the four main components of a market cycle and how can they recognize:

1st Accumulation phase
This phase occurs after the market has bottomed and the innovators (corporate insiders and a few investors value) and Early Adopters (smart money managers and experienced traders) begin to buy it that the worst is over. The valuations are very attractive. General market sentiment is still bearish. Articles in the media preach doom and gloom, and those who have long been through the worst of the bear market have recently capitulated, abandoned and sold the rest of their holdings in disgust. But in the accumulation phase, prices have flattened and for every seller throw in the towel, is someone there, pick it up in a healthy discount. Overall market sentiment begins to switch from negative to neutral.

2nd Mark-up phase
At this stage, the market has been stable for a while and begins to move higher. The early majority in the train. This group includes, technicians, to see that the market continues to higher highs and higher lows, recognize that market participants and moods have changed. Media stories begin to think about the possibility that the worst is over, but unemployment continues to rise, as well as reports of layoffs in many sectors. Since this phase matures, more investors jump on the train as a fear of being on the market is supplanted by greed and fear of being left out.

As this phase begins to come to an end, the late majority jump and market forces in quantities begin to increase. At this point, the greater fool theory prevails. The assessments increase beyond historical norms, and logic and reason a back seat to greed. During the late majority, the smart money and insiders are unloading. But as prices start to level off, or as the rise is slowing down, the laggards, were sitting on the edge see this as an opportunity to buy and jump in en masse. Prices make one last parabolic move, known in technical analysis as a selling climax, as the largest gains in the shortest possible time often occur. But the cycle is nearing the top of the bubble. Sentiment moves from neutral to bullish to downright euphoric during this phase.

3rd Distribution phase
In the third phase of the cycle market, vendors are beginning to dominate. This part of the cycle is a period in which the bullish sentiment of the previous phase turns into a mixed feeling. The prices are often remain in a trading range, most recently a few weeks or even months. For example, when the Dow Jones Industrial Average peak in Jan 2000, traded up near their peak and stayed there over a period of more than 18 months. But the distribution phase can come and go quickly: For the Nasdaq Composite, the distribution phase was less than a month as in March reached its peak in 2000 and then quickly withdrawn. If this phase is over, the market reverses direction. Classical pattern as double-and triple-tops, and head and shoulders above patterns, are examples of movements that occur during the distribution phase.

The distribution phase is a very emotional time for the markets, as investors are packed by periods of complete fear, mixed with hope and greed as well as in times of market seem to be off again. The reviews are extremely on many issues and value investors have long been sitting on the sidelines. Sentiment slowly but surely beginning to change, but this transition can happen quickly when a strongly negative geopolitical event or extremely bad economic news. They are not in a position to sell for a profit for a settlement breakeven or a small loss.

4th Mark-down phase
The fourth and final phase in the cycle is painful for those who still hold positions. Many hang on because their investment has fallen below what they paid, behaves like the pirates, falls overboard umklammert a bar of gold, refusing to let go in the vain hope that rescued. It is only when the market plunged 50% or more that the laggards, many of whom bought during the distribution or early mark-down phase, abandon or surrender. Unfortunately, this is a signal to buy early innovators and a sign that a soil is imminent. But unfortunately, is new investors buy the depreciated investment in the next phase accumulation and enjoy the next mark-up.