When Not to Buy During a Stock Price Cycle The accumulation phase is the starting phase of stock price cycle, when large institutions gradually keep buying shares of a stock. TradeZero Ocean Place Cable Beach, Unit #1 Nassau, Bahamas
Studying the stock market for effective stock trading and investing certainly involves studying stock cycles. It can help you get an idea about a stock’s trending conditions, whether it is moving up, down or sideways. This enables investors to plan their strategies so as to make profit and benefit from what the price does. For implementing the right strategy and minimizing risk, you need an understanding of the stock cycles, as explained by Investopedia’s Candy Schaap in this article. The Accumulation Phase While stock prices appear to be random, there are actually price cycles that are primarily the result of the activities of major financial institutions. When these large institutions buy stocks, the stock prices go through repeating cycles of movement. Such large institutional buying goes through a series of phases. But it all begins with the accumulation phase. Let’s have a detailed analysis of the accumulation phase of a stock price cycle. Here, institutional investors such as large banks, pension funds and mutual funds buy a significant number of shares of a particular stock. The price acts as a base, as the stock’s shares get accumulated. Institutional investors actually stock up these shares over long time periods so that they don’t drive up the stock price conspicuously. That gives these investors a significantly long time horizon. Not the Time to Buy For retail investors this isn’t the right phase of the stock cycle to buy, since the capital could be held up or there could be a large capital drawdown experienced by the investor. Recognizing Accumulation But recognizing the signs of accumulation provides you with more opportunity to benefit from any opportunity rising in the future. This is the phase when the price mostly has a sideways movement, called a range. The points of identification for the range, according to Investopedia’s Candy Schaap, are a whipsaw kind of price movement and variable pivot high points and low points. The following chart, mentioned in Investopedia, illustrates this:
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The green highlight indicates the length of the stock cycle. Another price pattern that indicates accumulation is called the cup and handle. The handle refers to a higher pivot low. This could indicate the accumulation cycle ending. If there is a higher pivot price high above the “cup’s” rim, it could move on to a new leg up. Investopedia explains the concept of “leg”here. It is basically a derivative position or contract in the underlying security. The following chart mentioned in Investopedia illustrates the cup and handle pattern.
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Identifying Non-trending Conditions Important in Accumulation Phase One of the characteristics of the accumulation phase is that it can erode your capital since the price could swing in both the directions. Adding an indicator can sometimes be useful in identifying non-trending conditions. One such indicator is the ADX (average directional index). The ADX is a trend-strength indicator, as can be seen in the chart below.
Here, the pricemoves sideways, with the ADX being added for showing trend strength. An ADX value below 25 indicates low trend strength or non-trending conditions. If the ADX is above 25, it indicates trend strength.
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