The art of market timing

Learn the classic market cycles of accumulation, marking up, distribution and mark down so you can time the market – consistently – and make steady profits at any time. When you hear someone on TV say that timing the market or that “market timing” is impossible, they are wrong. Let me be the first to say that market timing is not only possible, but also profitable on a consistent basis. As a technical trader, your purpose is to find the best trades and to time your entry and exit points. After all, you can find the best trade in the world, but if it’s not well timed, it can be a loss. Every stock or asset class goes through a classic market cycle. When you look at the chart of a stock or index, it moves in cycles. We all go through a life cycle, and we are also in the fall stage of the seasonal cycle. By observing cycles, we know what to expect next. This is true for stocks. If you noticed, all three were homebuilders and they have completed their market cycles which have ranged from 5 to 10 years. If you are a long-term investor or trader, your understanding of market cycles will benefit you a lot. Let’s talk about each stage and what happens during each stage of the cycle:

Stages of a market cycle

– Accumulation Phase – This is the bottom (or near bottom) of the market for a particular stock, sector or general market. At this stage, prices do not move upwards but rather stay within a neutral range. At this level, the smart money starts buying up large blocks of shares to accumulate a large position for their portfolio. They are patient enough to be able to wait for years, if necessary, as it is difficult to determine how long a stock or sector will last at this stage. Ordinary individual retail investors don’t even consider buying at this level because in most cases they have recently sold near the lows. It is at this stage that you pick up the biggest discounted stocks. This is where long-term investors should buy to realize the biggest long-term gains. – Mark Up Phase – This phase follows the accumulation phase and the way to know if this phase is occurring is to see a stock or sector that has “broken out” of its neutral range. This means that it must break above the upper trend line of the neutral range. From this point onwards, you should see an obvious increase in volume. Most of the institutions and individuals who are aware of this early trend will jump on board and take significant buying power with them. Another way to tell if you are in this stage is to see if we are forming higher lows and higher highs, confirming the start of a new uptrend. Towards the end of the mark-up phase, you will see full market participation, meaning that everyone from the shoeshine boy to the taxi driver will most likely have made an investment. This gets us ready for the next phase: – Distribution Phase – This is the peak of the market for a particular stock, sector or general market. Supply overwhelms demand after the smart money sells their shares to the “bigger fools” who buy at the peak. Since there are no other buyers left to raise the price, a stock or sector cannot advance higher and will therefore collapse under its own weight. The mood is extremely bullish. This phase is marked with extreme greed and fear. The best way to identify a top is through chart patterns, most notably the head-and-shoulders and double-top formations combined with breakdowns at the 200-day MA. This phase is usually characterized by the largest volume levels for a stock until we reach the accumulation phase again. – Mark Down Phase – Prices are in free fall and stocks are in full liquidation mode. This group consists of people who held beyond the distribution phase and did not sell, or those who bought at or near the top and refuse to sell at a loss. Either way, a loss will occur and the size of it will be determined when an investor wants to reduce it. You should not buy at this stage and those who try to find a bottom will be disappointed.

– Return to accumulation phase

Phase strategies

Accumulation phase

– Investors: Cash ” Buy – Traders: Cover/Buy Mark Up Phase – Investors: Buy – Traders: Buy

Distribution phase

– Investors: Sell ” Cash – Traders: Sell/Close

Mark down phase

– Investors: Cash – Traders: Short

Sentiment cycle

Beyond the actual price cycle, there is also a sentiment cycle that accompanies each stock, sector or overall market. Here is the general range of sentiment that follows (each chart is different, so this model is not exact for every situation): You may have found yourself in each of these emotional phases. Now that you know what to expect for each cycle, you need to harness your emotional engagement and separate it from your trading activities. You are your own worst enemy because emotions give way to destructive impulse trading. By understanding each cycle and the emotions that follow, you will be better prepared. By now, you understand why high-flying stocks crash to their lows. Market cycles are a normal and necessary function of rebalancing financial markets and restoring the balance between supply and demand. You are now positioned to take advantage of every market cycle for every stock and every sector in the future.

About the Vikingen

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