Understanding Time Cycle In Stock Market: There are a lot of ways in which people can analyze the stock markets and trade based on that analysis. One such way is time cycles and in this article, I’m going to show you how you can analyze and take trades using time cycles.
A cycle is an event, such as a price high or low, which repeats itself on a regular basis. Cycles exist in the economy, in nature, and in financial markets.
The basic business cycle encompasses an economic downturn, bottom, economic upturn, and top. Cycles are also part of the technical analysis of the financial markets.
Cycle theory asserts that cyclical forces, both long and short, drive price movements in the financial markets.
Time Cycles In The Stock Market
After the global financial crisis and recession of 2008, analysts expected the same economic crisis to repeat in 2018.
They claimed that the time cycle in which a new crisis forms, causing a massive decline in the stock market and resulting in the increase of the price of gold and the USD, lasts 10 years.
However, the evidence of a global crisis showed itself in 2020 only due to serious economic instability and the pandemic of coronavirus. We can say that there was a time lag but on the whole, the expectations were met.
Hence, we can expect another serious decline in the index in 2028–2030, while its growth is just beginning. Clearly, you do not have to rely on these dates only.
Track the situation in the market and try to find confirmations of these forecasts. Keep in mind the time lag as well.
The 4 Phases Of A Market Cycle
No matter what market you are referring to, all go through the same phases and are cyclical. They rise, peak, dip, and then bottom out. When one market cycle is finished, the next one begins.
The problem is that most investors and traders either fail to recognize that markets are cyclical or forget to expect the end of the current market phase.
Another significant challenge is that even when you accept the existence of cycles, it is nearly impossible to pick the top or bottom of one.
But an understanding of cycles is essential if you want to maximize investment or trading returns. Here are the four major components of a market cycle and how you can recognize them.
1. Accumulation Phase
This phase occurs after the market has bottomed and the innovators (corporate insiders and a few value investors) and early adopters (smart money managers and experienced traders) begin to buy, figuring the worst is over.
At this phase, valuations are very attractive, and general market sentiment is still bearish.
Articles in the media preach doom and gloom, and those who were long through the worst of the bear market have recently given up and sold the rest of their holdings in disgust.
However, in the accumulation phase, prices have flattened and for every seller throwing in the towel, someone is there to pick it up at a healthy discount. Overall market sentiment begins to switch from negative to neutral.
2. Mark-Up Phase
At this stage, the market has been stable for a while and is beginning to move higher. The early majority are getting on the bandwagon.
This group includes technicians who, seeing the market is putting in higher lows and higher highs, recognize market direction and sentiment have changed.
As this phase begins to come to an end, the late majority jump in and market volumes begin to increase substantially. At this point, the greater fool theory prevails.
Valuations climb well beyond historic norms, and logic and reason take a back seat to greed. While the late majority are getting in, the smart money and insiders are unloading.
3. Distribution Phase
In the third phase of the market cycle, sellers begin to dominate. This part of the cycle is identified by a period in which the bullish sentiment of the previous phase turns into a mixed sentiment.
Prices can often stay locked in a trading range that can last a few weeks or even months. When this phase is over, the market reverses direction.
Classic patterns like double and triple tops, as well as head and shoulders patterns, are examples of movements that occur during the distribution phase.
4. Mark-Down Phase
The fourth and final phase in the cycle is the most painful for those who still hold positions. Many hang on because their investment has fallen below what they paid for it, behaving like the pirate who falls overboard clutching a bar of gold, refusing to let go in the vain hope of being rescued.
It is only when the market has plunged 50% or more that the laggards, many of whom bought during the distribution or early markdown phase, give up or capitulate.
Once identified and understood, cycles can add significant value to the technical analysis toolbox. However, they are not perfect. Some will miss, some will disappear and some will provide a direct hit.
This is why it is important to use cycles in conjunction with other aspects of technical analysis. Trend establishes direction, oscillators define momentum and cycles anticipate turning points.
Look for confirmation with support or resistance on the price chart or a turn in a key momentum oscillator. That’s all for the article on What Is Time Cycle In Stock Market. We hope you enjoyed reading it. Happy Investing!
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