The Stock Cycle

Stock prices may appear random, but there are repeating price cycles, which are predominantly driven by the participation of large financial institutions. The activity of large institutional buying plays out in four distinct phases:

1. Accumulation
2. Markup
3. Distribution
4. Markdown

A trader must have a strategy to take advantage of price action as it is happening. Understanding the four phases of price will maximize returns because only one of the phases gives the investor optimum profit opportunity in the stock market. When you become aware of stock cycles and the phases of price, you will be prepared to profit consistently with less drawdown.
Accumulation Phase
The accumulation phase begins when institutional investors (such as mutual funds, pension funds and large banks) buy up substantial shares of a given stock. Price forms a base as the shares of stock are accumulated. Institutional investors must buy over long periods of time so as not to conspicuously drive up the price of the stock; they therefore have a long time horizon.

Markdown Phase
The last phase of the stock cycle is the markdown phase. Markdown begins when price makes a lower high and no new high (Figure 9). Markdown follows distribution, which is when institutions sell inventory, either for redemption reasons, simply taking profit or to change position into another stock or sector. The markdown phase is a downtrend (Figure 11).
Be careful that emotions do not rule trading during the markdown phase. Price is always the signal to watch; a series of lower pivot highs and lower pivot lows will signal a pullback in price or a trend reversal. A reversal is when price direction changes completely from the direction it was headed. Successful investors ensure that gains are banked, and money-management rules will not allow for holding a declining issue.

Taking Stock
The study of stock cycles will give investors the heads-up on trending conditions for a stock, whether sideways, up or down. This allows the investor to plan a strategy for profit that takes advantage of what the price is doing. The entire cycle can repeat, or not. It is not necessary to predict it - it is necessary to have the right strategy.
Now you can apply this information to learn to manage risk. Once you have a gain, have a plan to keep some: a gain is not a profit until you bank it. You can use a stop-loss as part of your trade-management plan to help you capitalize on your gains.
Smart investors who recognize the different price cycles are able to take the best profit opportunities. The good news is that you can learn to make the right trade at the right time.