Bulls on Wall Street
Every asset is in a phase of consolidation or trending. Market cycles apply to stocks, cryptocurrencies, futures, and any other market. When you master the market cycles, you can understand the big picture of an asset and gain an edge over most traders who trade solely on emotion and hype.
As momentum traders, we want to focus on the periods when assets are moving in an obvious direction. We find trends and stay with them as long as they move in the direction of the trend. The goal is to be in trends and avoid chop and range bound markets.
In this article, we will learn about the four phases and cycles that any asset will go through. We will use the cryptocurrency markets as examples. By learning to recognize these different stages, we will become more profitable traders because we know when to use a particular trading style.
An accumulation period is a period of time in which individual traders and institutions accumulate an asset. This period does not show a clear trend and is characterized by a period of sideways price movements that can precede a price increase. On a Bitcoin chart, this is called the “base” period. That period for Bitcoin was in 2016 before it began the ramp-up that put it on everyone’s radar in 2017. This period begins after the completion of a downtrend where sellers began to slacken and shorts began to realize their profits.
During this time there is a contraction in the price range and no real benefit for day traders. It is difficult to determine when the accumulation period ends, but once an important resistance level is broken and you see higher lows, the accumulation period is over and we are in the run-up phase.
The start-up phase is the best time for momentum traders. As soon as an asset comes out of the accumulation phase, a whole host of new buyers come in (traders like us). We all essentially aim for a limited number of stocks as the asset has little supply as it has just emerged from a long base period. At this point, the moving averages start falling and the price breaks out, leaving buyers in control.
The asset at the beginning of the run-up phase will be high in relation to its volume in the accumulation phase. You will see large volume patterns on all price spikes, followed by consolidations or small volume withdrawals. As long as the pullbacks are relatively low in volume in the upper part of their range, the trend can continue without fatigue.
The end of the ramp-up phase is often marked by increased volatility and even higher relative volume, when the asset no longer hits news highs and all traders are running for the doors at the same time, resulting in very heavy sell-offs. The pullbacks near long-term and large support levels i.e. moving averages continue to be bought, but when the bounces start to fail or become mild, a change in the environment is about to come, which means it is time to exacerbate your risk and watch out for a potential reversal.
The distribution period is similar to the accumulation period in that there is no clear price development and sideways price movements. In contrast to the accumulation period, this period is defined by the distribution of stocks, with savvy traders and larger institutions reducing or eliminating their holdings. This period usually ends at the end of a run-up as the demand for stocks no longer exceeds supply and the price moves sideways. In the case of Bitcoin in 2017, it went straight from the ramp-up to the downward phase.
The asset collapses are sharpening and the recovery quickly subsides as new supply continues to hit the market. A payout period can be a low volume, low volatility period that is ultimately tied to range as neither bulls nor bears can take control. However, there are small signs that supply is exceeding demand for the asset.
As soon as the supply of shares exceeds the demand, the distribution period ends and the run-down begins. This period is the reverse of the run-up with a defined downward trend in relation to the security price. This is not a good time for most traders. The news cycle is very negative and longs are trapped. There are large pocket holders in almost all assets, and vendors trying to catch the falling knives blow up.
This phase is characterized by lower lows and lower highs. Short sellers and sellers have tremendous supply and there is a large absence of buyers, which creates pressure in the markets. During this time, fundamentals, news, everything is thrown out the window as only fear drives the market.
Logic doesn’t rule this period and the assets turn out much lower than anyone imagines. Often times, climatic sales and the bulls giving up total hope coincide with the end of the decline. When the market experiences a period of higher lows, it can enter the accumulation phase. When we see higher highs and higher lows, we may have a complete reversal and skip the accumulation phase. Most of you reading this have never seen this time!
These cycles do not always take place in the correct order. In the case of Bitcion in 2017/2018, the run-up phase was skipped directly into the run-down phase. Sometimes a downtrend market will strongly reverse and skip the accumulation phase (think what the stock market did after the COVID crash last March). Sometimes there are marketing signs in a store and then the ramp-up resumes. These market phases are not always textbooks. However, knowing them can help you understand when a market is trending and what your prejudices should be.
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