Stock Stages and Cycles

There are only three things a stock can do. It can go sideways, up or down. That is all! However, we will cover two kinds of sideways movement. Sideways movement will either lead to an uptrend or a downtrend. Therefore, we will be discussing four stages of a stock cycle.

Stage 1 and Phase A

During the flat, or beginning, stage (Stage 1) of a stock’s cycle, the market psychology is one of ambivalence or uncertainty. If a stock is moving in a flat or sideways tight pattern would you want to buy it? A trader will be looking specifically for a transitional phase (Phase A), which will give her information about which way the stock might move next.

Stage 2 and Phase B

During the upward movement stage (Stage 2) of a stock, market psychology changes to basic greed. Everyone is jumping in and wants to stay in, even if the stock changes direction. A trader learns to read the signs of change that tell him the stock has entered another transitional phase (Phase B). During Phase B, a trader will learn to move out of the long position and consider other possibilities, for example, entering and exiting a stock more quickly as the stock begins to move in a sideways movement.

Stage 3 and Phase C

During the sideways movement stage (Stage 3) of a stock, market psychology once again becomes one of ambivalence and uncertainty. Look for another transitional phase (Phase C), which will clearly illustrate that the stock might be moving into another stage or downward direction.

Stage 4 and Phase D

The last possible movement is the downward movement stage (Stage 4) of a stock. The market psychology is fear. Until the stock begins to bottom out and change direction into a transitional phase (Phase D), market sentiments are still clearly based in fear.

These stages and transitional phases continually repeat themselves over and over as the stock builds its personal history. A trader will learn to recognize and use this information to safely make money on the inevitable change a security will make.

THE 3, 5 AND 8 CYCLE PATTERN

Some chart technicians pay attention to minute stock cycles. Even if you take a position that not a lot of attention needs to be placed on this endeavor, it is important to know the basic cycle direction of the stock. There is one cycle day indicator to discuss more thoroughly, the 3, 5 and 8-day pattern.

Every rising stock must decline from time to time. Stocks that are generally in an up trend tend to stop declining on the third, fifth, or eighth day down. Why? Who knows! A look at the history of a stock illustrates the theory. When a rising stock starts to fall, look for a turning point on the third day. If the stock does not turn on the third day, look for it to turn on the fifth day. If the fifth day fails to produce a halt in the descent, the odds are that a strong bounce will occur on the eighth day, especially if the history of the chart indicates this behavior. If other indicators verify a possible entry, coupled with the market minder telling the trader this is the day for the stock or sector to change direction, look at the days down, and the trader might have an entry point.

This concept works best on rising stocks. Flat to declining stocks require other indicators. Look for two previous turning points to occur on either the third, fifth or eighth day down. Never use this method as a stand-alone technique if the third, fifth and eighth day down method is not the stock’s history. Instead, does the stock use a different number of days? If so, it is unusual, but not difficult to trade. Count the days the stock does respond to and look to trade there. However, most stocks, for unknown reasons, typically trade on the third, fifth, and eighth day down.

There are four break points in chart analysis that help determine the best time to enter and exit a stock.

The Breakout - Three Criteria of Transitional Phase A

1. The initial breakout: the stock breaks above resistance. This represents an excellent entry point, but is difficult to ascertain and often riskier than other entry points, such as buying on a pullback. Shorterterm traders often ignore this entry in favor of a safer one.

2. The first pullback: the stock corrects or pulls back toward this initial breakout. This represents the safest entry point and a second chance to buy an uptrending stock.

3. The secondary breakout: the stock moves above its prior peak. This is a repeat of the initial breakout and is a poor entry point. Buying at this point means a trader is probably chasing the stock. For a safer entry, wait for another pullback. This entry point is best for the intermediate or longer-term trader. The first pullback has become a new level of support, and the secondary breakout becomes the new resistance.

Transitional Phase A (movement from Stage 1 to 2)

The breakout is Transitional Phase A. This phase ends Stage 1 and begins Stage 2. It is a difficult period to trade because of its volatility. In most cases, it moves past most traders and only becomes a viable play on a pullback.

Upward Trendline Break - Three Criteria of Transitional Phase B

1. The initial break: The stock does not create a higher high and breaks an upward trendline.

2. The first pullback: The stock moves back up toward the breakdown point but does not hit its resistance line.

3. The second break: The stock moves below its prior low and begins to create a new low, thus breaking its most recent support line. The stock has refused to break its resistance line, but does move down past its support line into new territory.


Transitional Phase B (movement from Stage 2 to Stage 3 or 4)

An upward trendline is broken to form Transitional Phase B. This transition ends Stage 2 and begins Stage 3. This period is often difficult to trade because of its volatility. In most cases, it moves past most traders and only becomes a viable play on the first pullback rally. It is important to be aware that a stock may go directly to Stage 4 without establishing Stage 3 first.

The Breakdown - Three Criteria of Transitional Phase C

1. The initial breakdown: The stock breaks below support. This represents an excellent entry shorting point. However, it might be difficult to catch this exact point. A trader should not be concerned if this entry point is missed because this is a riskier point than selling on a rally. Traders will often ignore this entry in favor of a safer entry point. Day traders are shorter-term traders.

2. The first rally: The stock corrects or rallies (rebounds) toward the initial breakdown point. This represents the safest entry point and a second chance to sell short a declining stock.

3. The secondary breakdown: The stock declines below its prior low. This is a repeat of the initial breakdown and is a poor entry point. Selling at this point means a trader is chasing the stock. For a safer entry wait for another rally. This entry point is best for the intermediate or longer-term trader. Please note that the first rally has now become a new level of resistance, and the secondary breakdown has become the new level of support.

Transitional Phase C (movement from Stage 3 to Stage 4)

A breakdown of a sideways movement makes up Transitional Phase C. Transitional Phase C ends Stage 3 and begins Stage 4. This period is often difficult to trade due to its volatility. In most cases it moves past most traders and only becomes a viable play on a #2 rally.

Downward Trendline Break - Three Criteria of Transitional Phase D

1. The initial break: A stock does not make a lower low and breaks a downward trendline.

2. The first pullback: A stock moves down toward the breakdown point, but does not hit its support line.

3. The secondary break: A stock moves above its prior high and begins to create a new high, thus breaking its most recent resistance line. The stock has refused to break its support line but does move past its resistance line into new territory.


Transitional Phase D (movement from Stage 4 to Stage 1 or 2

A downward trendline breaks to the upside to make a Transitional Phase D. Transitional Phase D ends Stage 4 and begins Stage 1 or 2. This period is often difficult to trade because of its volatility. In most cases it moves past most traders and only becomes a viable play on a #2 pullback. Note that the stock can go directly into Stage 2 without establishing Stage 1 first.

Source: http://trading-stocks.netfirms.com/stock-stages.htm

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