When analyzing stock prices, it is mandatory for traders to understand the cycles of the stock market . The reason is simple, because traders can easily find out the current position in the stock market through the cycle.
Thus determining the timing of buying, selling, or holding becomes more precise. Then, what is the stock market cycle in question?
The stock cycle begins with stage 1 which is called accumulation. Accumulation is a phase where the stock market is in the lowest range with the trend direction showing sideways . At this stage, the stock valuation is considered discounted, so it looks attractive in the eyes of big funds such as institutions, fund managers , and foreigners.
As a trader you may be wondering, when does the stock move from accumulation to the next phase ( uptrend )? This is where the basic principles of technical analysis come into play. A trader must be able to determine the upper limit or resistance and the lower limit or support from the ongoing sideways.
The stock will start to enter an uptrend towards stage 2 when there is a breakout with high transaction volume. This means that several positive sentiments, regional issues, and global issues have pushed stock prices to penetrate the resistance area.
Other characteristics that indicate a sideways trend towards an uptrend are the formation of higher highs and higher lows . High high is a peak that is higher than the previous peak. While the higher low is a gap that is higher than the previous gap.
If we look at the chart above, AGII shares experienced sideways for a long time before finally exiting the bullish reversal cycle ( stage 1) which was marked by the appearance of a breakout . Breakout to the bullish continuation area is followed by a larger transaction volume than before.
In addition, every price movement also forms new higher highs and higher lows .
After passing the accumulation phase, stocks that have shown a breakout then enter stage 2 or the participation phase. Participation is a stock market condition that moves up and confirms an uptrend . Participation is also commonly referred to as the mark-up phase .
In participation, retailers usually start buying shares as they see the trend has started to rise and sometimes become too optimistic. This then causes the volume of transactions to soar. So, in terms of valuation , the stock is starting to be considered expensive.
From the chart, the participation phase formed several higher lows and higher highs until they eventually reversed towards the sideways or downtrend.
Distribution is the phase of the third stock cycle ( stage 3) where selling or profit taking from market participants, especially institutions, dominates. As a result, the stock price that was originally in a bullish condition began to move sideways or up and down with a limited range for several periods.
Generally, a sign of distribution is followed by a stock price that suddenly falls sharply with a large transaction volume. After that, the stock price moved up again with a small transaction volume.
This condition occurs until the target of selling shares from big investors has been achieved. The stock price then advanced to stage 4 because there was no big buying power from big funds.
Several patterns such as double tops, triple tops, and head and shoulders are the patterns that are most often found in this phase. All three include a bearish reversal pattern which indicates a reversal to a downward trend.
However, it is important to know that stocks that are currently in stage 3 will not necessarily reverse direction and experience a decline. When the stock price rises and consolidates in the upper position, the sideways trend that occurs may return to stage 1, depending on which direction the stock will move later.
If a breakout sign appears , then the stock is in the accumulation phase and can continue to move up to stage 2. Conversely, if a breakdown confirmation appears , it means the stock is in the distribution phase and has the potential to decline.
Capitulation is the last phase in the stock market cycle which is indicated by a downward price movement or a downtrend . This is because the shares that have been released by big money in the distribution phase are now circulating freely in the market and controlled by retailers where they have different buying and selling strategies.
For traders who sell late in stage 3, it is certain that they will experience a floating loss until the stock turns to bullish . Those who sell late are usually called nyangkuters .
However, when the price fell even deeper, some professional market participants actually saw this condition as a signal that the stock price had reached its lowest level ( bottom ), which in turn became the right timing to buy shares. Because theoretically, later the price will bounce from the lows and return to the accumulation phase.
Thus the stock market cycle consists of the phases of accumulation, participation, distribution, and capitulation. These four phases are only a small part of the many components of technical analysis that need to be understood.
For those of you who want to learn more, upgrade to a VIP user to enjoy the automate trading feature . By becoming a VIP user, you can enjoy educational content, analysis, research reports, intensive stock questions and answers, stock references, morning and day briefings, cryptoclasses, and regular seminars every weekend.