What Is a Stock Cycle?
A stock cycle is the typical evolution of a stock's price from an early uptrend to price high through to a downtrend and price low.
Richard Wyckoff, a prominent trader and pioneer in technical analysis, developed abuy-and-sell stock cycle that occurs over four distinct stages:
- Accumulation
- Markup
- Distribution
- Markdown
Key Takeaways
- The stock cycle, often attributed to technical analyst Richard Wyckoff, allows traders to identify buy, hold, and sell points in the evolution of a stock's price.
- There are four phases of the stock cycle: accumulation; markup; distribution; and markdown.
- The stock cycle is based on perceived cash flows into and out of securities by large financial institutions.
How Stock Cycles Work
Stock prices may appear random, but there are repeating price cycles that are predominantly driven by the participation of largefinancial institutions (FI). As a result, following cash flows reasoned to originate from these large players can be identified as occurring in a cyclical manner.
The Wyckoff stock cycle has expansion and contraction periods, much like the economic cycle. It can be used for portfolio management allocation, allowing for increased investment during the accumulation and markup phases and profit-taking during the distribution and markdown phases. Investors measure a stock cycle by comparing the distance between lows to help determine where prices are in the current cycle.
A trader must have a strategy to take advantage ofprice actionas it is happening. Understanding the four phases of price action can maximize returns because only one of the phases gives the investor optimum profit opportunity in the stock market. Becoming aware ofstock cyclesand the phases, allows investors to be prepared to profit consistently with lessdrawdown. The study of stock cycles gives investors a heads-up on trending conditions for a stock, whether sideways, up, or down. This allows them to plan strategies for profit that take advantage of what the price is doing.
The entire cycle can repeat, or not. It is not necessary to predict it, but it is necessary to have the right strategy when it occurs.
Understanding the Wyckoff Stock Cycle Phases
- Accumulation: An uptrend starts with the accumulation phase. This is where institutional investors slowly begin acquiring large positions in a stock. Investors use support and resistance levels to find suitable entry points at this stage of the stock cycle. For instance, investors may start accumulating a security when it nears the lower end of a well-established trading range.
- Markup: A breakout of the accumulation period starts the markup cycle. Trend and momentum investors make the bulk of their gains during this phase, as a stock's price continues higher. In this part of the stock cycle, traders use indicators, such as moving averages (MA) and trendlines, to help make investment decisions. For example, an investor may buy a stock if it retraces back to its 20-day moving average.
- Distribution: Institutional investors start unwinding their positions at this stage of the stock cycle. Price action begins to move sideways, as the bulls and bears fight for control. A bearish technical divergence between a stock's price and technical indicator often starts to appear in the distribution phase. For example, a stock's price may make a higher high while the relative strength index (RSI) makes a lower high.
- Markdown: Volatility often increases during this phase, as investors rush to liquidate their positions. Investors use temporary retracements to the upside as an opportunity to sell their shares, while traders look to open short positions to take advantage of falling prices. Typically, margin calls increase near the conclusion of the markdown cycle, as stock prices near their lows, which may help explain the climactic volume often associated withthis part of the stock cycle.
FAQs
Learn to identify the four stages of a stock market cycle: accumulation, markup, distribution, and markdown. From the changing seasons to the ebb and flow of the economy, cycles are all around us. Each is driven by unique forces and made up of individual stages.
What are the 4 phases of the stock market cycle? ›
Every market cycle includes four stages: accumulation, markup, distribution, and markdown. If you've ever heard people use terms like “bubble burst”, “crash”, or even “recovery”, what they're referring to are various stages of the market cycle.
What are the stock cycle steps? ›
- Accumulation Phase.
- Markup Phase.
- Distribution Phase.
- Markdown Phase.
- The Bottom Line.
Cycle stock is the inventory necessary to keep production running and customer orders fulfilled. This includes the raw materials used in the manufacturing and the finished products waiting to be shipped. To calculate cycle stock, businesses need to consider both manufacturing lead time demand and production quantity.
What is the stock market cycle pattern? ›
The stock market cycle is the recurring pattern of market trends and investor behaviour over time. It includes phases of expansion, contraction, and recovery, influenced by a variety of economic factors and market dynamics.
How do stock market cycles work? ›
Cycles and stages are also present in the movement of stocks and understanding their dynamics can help provide investors with potential insights and investment opportunities. The four stages of a stock market cycle include accumulation, markup, distribution, and markdown.
What are the 4 stages of the trade cycle? ›
According to Prof. Schumpeter, a trade cycle can have 4 phases : (1) Expansion or Boom, (2) Recession, (3) Depression or Trough or Contraction, and (4) Recovery. This phase of the business cycle represents the best stage of prosperity.
What is the stock life cycle? ›
There are four phases of the stock cycle: accumulation; markup; distribution; and markdown. The stock cycle is based on perceived cash flows into and out of securities by large financial institutions.
How do you identify stock stages? ›
The market cycle has four main stages: accumulation, markup, distribution, and markdown. Each stage reflects different stages of price action and investor emotions. The accumulation stage happens as the market bottoms out, and “smart money” investors start buying (or accumulating) investments at lower prices.
What are the 7 steps of stock making? ›
How to Make Stock or Broth
- Step 1: Meat Trimmings. Butcher a chicken to obtain bone and meat remains. ...
- Step 2: Cover in Water. Cover the meat and bones in cold water. ...
- Step 3: Heat the Water. ...
- Step 4: Skim. ...
- Step 5: Simmer. ...
- Step 6: Cut Vegetables. ...
- Step 7: Add Vegetables and Herbs. ...
- Step 8: Simmer Down.
The economic and market cycles and our emotions
Economic cycles range from 28 months to more than 10 years. Stock market cycles have typically anticipated economic cycles by 6–12 months on average. The cycles are familiar—the economy expands and contracts and the markets rise and fall.
How do you cycle inventory? ›
Here are some tips to help manage your cycle inventory:
- Maintain good records. Good inventory records help you account for inventory and determine the company's inventory needs. ...
- Use inventory software. ...
- Perform frequent calculations. ...
- Communicate with vendors.
T: Reorder interval (cycle) length = EOQ/R. n: Ordering frequency: number of orders per unit time = R/EOQ. The total cost (without purchasing cost) curve reaches its minimum where the inventory carrying and ordering costs are equal.
How do stock patterns work? ›
How do stock chart patterns work? Chart patterns work by representing the market's supply and demand. This causes the trend to move in a certain way on a trading chart, forming a pattern. However, chart pattern movements are not guaranteed, and should be used alongside other methods of market analysis.
How to identify stage 2 stocks? ›
Stage 2 Characteristics
The stock price is in an obvious uptrend, characterized by higher highs and higher lows. Short-term moving averages are above long-term moving averages. Volume spikes on big up days and big up weeks are countered by volume compressions during normal price pullbacks.
What is the order flow in the stock market? ›
Order flow trading is a type of short term trading strategy as it is used to enter the market accurately based on recent executed buy and sell orders. Order Flow Trading is sometimes referred to as a form of volume trading.
What are the 4 stages of the market life cycle? ›
There are four stages in a product's life cycle: introduction, growth, maturity, and decline. A company often incurs higher marketing costs when introducing a product to the market but experiences higher sales as product adoption grows.
What are the 4 phases of the financial cycle? ›
The business cycle is the time it takes the economy to go through all four phases of the cycle: expansion, peak, contraction, and trough. Expansions are times of increasing profits for businesses, and rising economic output, and are the phase the U.S. economy spends the most time in.
What are the 4 common phases of economic cycle? ›
What Are the Stages of an Economic Cycle? An economic cycle, or business cycle, has four stages: expansion, peak, contraction, and trough.
What are the 4 stages of market development? ›
There are four stages of market development. They include the inception or introduction stage, growth stage, maturity stage, and decline stage.
