Structure and secret behavior of Stock Market

Market structure and it’s secret behavior is the very important aspect of stock market that most people tend to ignore. Many traders worry about the stock market movement that it is confusing to understand it because of its irregularity. We will try to explain the basic inner workings of stock movement in any market.

4 secret stages of Stock movement behavior

If you pay close attention, market move sin 4 stages. Further, this means if you figure out which stage the market is in now, you do not have to worry about whether to buy or sell. This makes things clear and provides a new perspective to look at market. Now, let’s see the 4 stages in detail.

Accumulation Stage

Accumulation Stage comes after a decline in price and it will look like a range market or sideway trend with in a downtrend. This happens because the stock can only go low to an extent and then the buyers will take charge and they will try to take the advantage of the low prices and push the price higher.

As the sellers are trying to sell in downtrend and the buyers are buying at cheap prices, this will end up in equilibrium. This equilibrium is called as accumulation stage. Indeed, this is where smart people accumulate their position hoping the prices to go higher.

Characteristics of Accumulation stage

1. It occurs after the price has fallen over the last five months or more (on the daily timeframe).
2. It looks like a range market with obvious areas of support and resistance within a downtrend.
3. The 200-day moving average starts to flatten out.
4. The price swings back and forth around the 200-day moving average.

This definitely does not mean that always the stock will go up after the accumulation stage. Please remember that stock market is about probabilities and not certainties. But, if the stock moves up breaking the resistance in the accumulation stage, then we move onto Advancing stage.

Advancing Stage

Advancing stage occurs after the price breaks out of resistance in accumulation stage. This happens because the stock cannot always be in equilibrium and buyers or sellers will take charge sooner or later. This stage will look like an uptrend. So, for advancing stage to occur, buyer pressure must overcome the seller pressure.

Characteristics of Advancing Stage

1. It occurs after the price breaks out of resistance in an accumulation stage.
2. You’ll see a series of higher highs and lows.
3. The price is above the 200-day moving average.
4. The 200-day moving average is starting to point higher

Distribution Stage

Distribution stage comes after an uptrend and it looks like the range market with in an uptrend. This happens because the market cannot go up always and at some point sellers will take the lead and push down the price.

At this point, we have traders who are selling at high prices and buyers buying in uptrend. So, it reaches a equilibrium stage and looks like a range market called as Distribution stage. Here, smart people sell their stocks and make money as they anticipate lower prices.

Characteristics of Distribution stage

1. It occurs after the price has risen for the last five months or more (on the daily timeframe).
2. It looks like a range market with obvious support and resistance areas in an uptrend.
3. The 200-day moving average starts to flatten out.
4. The price whips back and forth around the 200-day moving average.

After this, there is no rule that price will come below support but if it does then we go to declining stage.

Declining Stage

The declining stage occurs after the price breaks out of support in the distribution stage. This happens because the market cannot stay in equilibrium forever and at some point either buyers or sellers will take the lead. If the sellers take the lead and pushes down the price, then we move to declining stage or a downtrend.

Here, selling pressure will be more than buying pressure which leads to a start of downtrend.

Characteristics of Declining stage

1. It occurs after the price breaks out of support in a distribution stage.
2. You’ll see a series of lower highs and lows.
3. The price is below the 200-day moving average.
4. The 200-day moving average is starting to point lower.

What is the use of learning the 4 stages of market? You will know whether to be a buyer or to be a seller if you know at what stage you are in.

There will be times when the market structure isn’t obvious. So what do you do in this scenario? You stay out of that market. There are plenty of trading opportunities with “cleaner” market structure. So don’t force a trade if you don’t have a read on the markets.

Read about the Golden rules to be followed in stock market here so that you would not miss out on profits that you deserve.

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