The 4 Stock Market Stages Every Stock Will Go Through

If you have never read or learn about the 4 stock market stages, I guarantee you this information will blow your mind away. If you have lost money in the past and wonder what went wrong in the stock market, then this little piece of information that is worth millions will change your perception of the stock market.

Without beating round the bush, there are 4 stages that every stock will go through. They are:

  1.  Stage 1 (Basing or Bottoming)
  2.  Stage 2 (Uptrend or Bull Market)
  3.  Stage 3 (Market Top)
  4.  Stage 4 ( Downtrend or Bear Market)

Every stock, index, etf, whatever that trades will go through this cycle again and again. Let's take a look at the monthly chart of the S&P 500 Index below.

You can see how the S&P 500 index above went through the 4 stages twice. 

Let's take a look at the daily chart of Alibaba below.

Alibaba was in a Stage 1 basing till July and from there to October it was in a stage 2 uptrend. It then entered a stage 3 and subsequently entered into a stage 4 downtrend. At the moment of writing, the stock is in a new stage 2 daily uptrend.

Let's take a look now at the 60 min chart of

The 60 min chart looks repetitive isn't it. No matter what time frame, a stock will go through the 4 stages at some time.

The 4 Stages Happen In All Time Frames

The charts above tell us one thing.

The 4 stages of the market happens in all kinds of time frames. No matter it is a monthly time frame or weekly or even up to a 5 min timeframe, stocks WILL go through the 4 stages. That is why investors and short term traders alike can profit in the market if they know the 4 stages well.

The 2 charts of the 60 min futures chart of Dow and SPX is a recent event that happen in the major indexes. I put them here to show that the 3 stages of the market happen now and then. The smaller the time frame the more frequent it is. Monthly and weekly charts will seldom have a complete Stage 1 to Stage 4. It happens over many many months and years. But smaller time frames like the 60 min, 15 min and 5 min charts will have frequent Stage 1 to Stage 4 complete cycles.

What To Do In Each Stage

You now know that there are 4 stages in the market. So what do you do in each stage. Here is a summary of what to do:

  • Stage 1 (Do nothing)
  • Stage 2 (Buy the stock)
  • Stage 3 (Start selling and do not buy)
  • Stage 4 (Stay away or learn to short stocks)

It is simple as that. Not any more complicated than what most professionals in Wall Street make it sound like. So, if you have lost money in a stock in the past, go back and check out the stock chart. You will most likely have bought it near Stage 3 or perhaps Stage 4.

One simple way to make sure that you are at the right side of the market is to see whether the stock is above or below its 20 period moving average. When the stock is above its 20 MA, you focus on longs. When it is below its 20 MA, you stay away or learn to short.

How Market Stages Pointed To The Big Stock Market Plunge In February 2018

I think the recent stock market plunge in February 2018 has left many surprised and shocked at the amount of damage that the stock market can give investors. For such a long time, we have only known a bull market with non stop rises.

This can be especially painful for first time investors and traders who have been accustomed to the bull market. You really have to go back to a very long time to experience such a plunge. And for newbies, they have not gone through that kind of experience that prepares them mentally for such a devastation.

How on earth did the stock market plunge back in February 2018 happen?

Well, all you have to do is to check out which stage that the market was in.

First of all, we had a nice base back in December 2017. This set up a nice bull run stage 2 uptrend that brought many joy to investors. The stock market seem to be running up non stop and soon people were talking about Dow 30000 in no time!

Notice how in the chart above, the market was above the 60 min 20 MA as it begin the nice uptrend. I'm showing you the 60 min chart so you can see the nice stage 1 to stage 4 clearly.

The SPY represents the S&P 500 and you can see how it had a nice run up. The SPY then dropped below its 60 min 20 MA and this started to give us hints that a stage 3 market top was happening. Eventually, the SPY entered into a stage 4 downtrend and the plunge begin to happen.

In just a matter of days, the plunge erased the gains the SPY had for 2018.

Well, the plunge did not last long and soon we see the SPY going back above its 60 min 20 MA once again. This was a new stage 1 basing. After that, the market begin a new stage 2 uptrend in the 60 min chart.

You see, the market goes through the 4 stock market stages again and again and again. It does not matter which time frame you look at. Eventually, the market will always form and complete the 4 stock market stages.

So what will you do if you are an investor and you happen to look at the 60 min chart of SPY?

The same formula applies:

  • You buy when SPY is in an uptrend and in a Stage 2
  • You sell when SPY is in a stage 3 market top
  • You short stocks when SPY is in a stage 4 downtrend

If you are able to follow this simple formula again and again, you will go far in investing and trading!

Stages Can Appear Even In Intraday Charts

For those who like to day trade, the 4 stages of the stock market can be extremely useful.

From my experience, a day trader usually does not hold allegiance to longs or shorts like most investors. If the market is up, they will long, if the market is down that day, they will be short.

Thus, I would say that there is an advantage if you learn a bit about day trading as it will allow you to make money in any kind of environment.

This is a 5 min chart which I have annotated recently. It is the 5 min chart of the QQQ. As you can see, even in the 5 min charts we can see how the market stages play out.

Stage 1 was the basing stage where the QQQ tries to find a bottom. Then the QQQ entered into an uptrend and started a new stage 2 in the 5 min chart. I actually bought the QQQ and traded the QQQ as it entered into stage 2 in the 5 min chart.

Notice how the QQQ had a nice run up when it was in a stage 2 uptrend.

The next day, the QQQ gap up and traded sideways a bit. This actually was a stage 3 top. It then broke below the consolidation it made and entered into a stage 4 downtrend and eventually morphed into a panic selling all throughout the afternoon session.

Most traders will have their own system to know when to buy or when to sell. I like to use the red zone white zones in the 5 min chart to help me know when I should focus on longs and when I should focus on shorts.

I color the area below the 5 min 50 MA red so its easy for me to know what is going on.

As you can see, the start of the stage 2 uptrend coincided with QQQ entering into the white zone and the start of a stage 4 downtrend in the 5 min chart coincided with the QQQ entering into the red zone.

So what do you do in each situation?

If you are a day trader or a hit and run trader...

  • You long stocks intraday if QQQ is in the white zone and stage 2 uptrend
  • You short stocks intraday if QQQ is in the red zone and stage 4 downtrend

The beauty about looking at the QQQ is it is the ETF that represents tech stocks. So when the QQQ is in an intraday uptrend or downtrend, most tech stocks will be going up or down according to what the QQQ is doing. Some may rise more or drop more than the QQQ and this often produces excellent risk reward trades for traders.

The 4 Stock Market Stages In Weekly Chart

If the 4 stock market stages works so well in intraday charts, it can also work very well in weekly charts. As time goes by when I see a good example I will post it here and update this page so you can see the power of stage analysis.

The recent example that I found is a Malaysian stock called Kronologi. In the past I have written an article on this stock titled Chart Lessons From Kronologi, The Stock That Soared More Than 100% In 2 Months.

But in this article let's fast forward and look at how the stock completed a Stage 1 to Stage 4 in the weekly charts.

From around mid 2015 to early 2017, the stock was basing and formed a weekly Stage 1. Then in 2017, the stock begin a nice Stage 2 uptrend. This was a time when the stock soared by a few hundred percent.

This is the time to invest and buy the stock. Stage 2 bull runs are the best times to make money in the stock market.

Notice how the stock topped out when it formed a topping tail. This is where Stage 3 happened. The stock topped out and then it begin a Stage 4 decline.

Stage 4 downtrend is not a place for investors to invest their money. One must be patient to wait for the stock to start a new Stage 2 uptrend before committing new money into the stock.

The weekly chart of Unisem above which is another Malaysian stock also shows us how the 4 stock market stages can be easily applied to analyze what a stock is doing.

Perhaps a good way to spot the change from Stage 2 to Stage 3 to Stage 4 is to use the weekly 20 MA. Notice how the stock stays above the rising 20 MA when it is in Stage 2. As it tops out, it starts to touch the 20 MA. Then when it begins a Stage 4 downtrend, the stock falls below the 20 MA.

You can also try to find some pattern failures to help you spot the top as well. Notice how Unisem made a triangle pattern? A triangle pattern is usually a continuation pattern. The stock failed to breakout of the triangle pattern but instead it broke below the pattern and went below the 20 MA.

This gave hints to investors that the stock was topping out and one should be cautious when this happens. Those who heeded the warning were able to get out of the stock before it tumbled down.

The stock is currently in a downtrend and is not suitable for investing on the long side. The bull market is over and investors might need to wait a long time before a new uptrend starts again.

Conclusion

You have now learned one of the knowledge that separates many experienced traders from the newbies. This knowledge is priceless. Don't ever play a stock without considering which stage it is in. From now on, you will approach the markets with confidence knowing what to do in each situation.

Charts with the Freestockcharts.com label are courtesy of Freestockcharts.com

Charts with the investing.com logo are courtesy of Investing.com powered by Trading View

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