The Art of Market Timing

Learn the classic market cycles of accumulation, mark up, distribution and mark down so that you can time the market -consistently – and make steady profits any time. When you hear someone on TV say 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 is not timed well, it may turn into a loss. Every stock or asset class goes through a classic market cycle. When you look at the chart of any stock or index, it moves in cycles. We are all going through a life cycle, and we are also in the autumn 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 has ranged from 5 to 10 years. If you are a long-term investor or trader, your understanding of market cycles will greatly benefit you. Let’s talk about each stage and what is going on during each stage of the cycle:

Stages of a Market Cycle

  • Accumulation Phase – This is the bottom (or near the bottom) of the market for a particular stock, sector, or general market. At this stage, prices do not move upward but rather stay within a neutral range. At this level, the smart money begins to buy up large blocks of shares to accumulate a large position for their portfolio. They are patient enough to be able to wait years, if needed, because it is difficult to determine how long a stock or sector will be in this stage. Regular individual retail investors do not even consider buying at this level because, in most cases, they have recently sold close to the lows. It is at this stage where you pick up the biggest discounted stocks. This is where long-term investors should be buying to realize the greatest 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 on, 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 bring along significant buying power with them. Another way to tell if you’re in this stage is to see if we are forming higher lows and higher highs, confirming the start of a new uptrend. Toward the end of the mark up phase, you will see full market participation, meaning everyone from the shoe shiner to the cab driver will most likely have made an investment. This sets us up for the next phase:
  • Distribution Phase – This is the top of the market for a particular stock, sector, or general market. Supply overwhelms demand after the smart money sells their shares to the “greater fools” who buy at the top. Because there are no other buyers left to raise the price, a stock or sector cannot advance higher, and thus, will collapse under its own weight. The sentiment 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-shoulder and double top formations combined with breakdowns at the 200-day MA. This phase is usually marked by the greatest volume levels for a stock until we reach the Accumulation phase once again.
  • Mark Down Phase – Prices are in free fall and stocks are in full liquidation mode. This group is made up 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 be incurred, and the size of it will be determined when an investor wishes to cut it. You should not be buying at this stage and those that 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/ Short

Mark Down Phase

  • Investors: Cash
  • Traders: Short

Sentiment Cycle

In addition to the actual price cycle, there is also a sentiment cycle which accompanies each stock, sector, or overall market. Here is the general range of emotions that follow (each chart is different, so this model is not exact for every situation):   You may have found yourself within each of these emotional phases. Now that you know what to expect for each cycle, you’ll have to harness your emotional involvement and separate it from your trading activities. You are your own worst enemy because emotions give room for destructive impulse trading. By understanding each cycle and what emotions follow, you’ll be better prepared. By now, you understand why high flying stocks crash to their lowest levels. Market cycles are a normal and necessary function in balancing the financial markets and restoring equilibrium to the forces of supply and demand. You are now positioned to take advantage of every market cycle for every stock and every sector in the future. Take a look at 3-year charts for TRA, CROX, and MON for additional examples of full-length charts.