The Four Phases of a Stock's Price Cycle

This was one of the most important things I learned from reading Ted Warren's book. Practically every stock goes through a basic four-phase cycle of price action, which can best be defined by the following terms: (1) The base: Also known as the accumulation period, (2) The rise, also known as the markup period, (3) The top, also known as the distribution period, and (4) the drop, also known as the markdown period.

The base period can also be known as the foundation period. In a nutshell, this is the time period that really not a whole lot looks like it's happening. It can be compared to the time period right after you plant a seed; there's a certain amount of activity happening "below the surface" that simply isn't exciting at all, because no outward evidence has showed up yet. Basically, this is the period of time where the insiders that are "in the know" are quietly buying shares somewhat "under the radar".

The rise period is also known as the markup period; this is when the "sponsors" (read: manipulators) of a stock begin to "advertise" the stock and make it appear attractive on the markets. With the right type of buying activity they can cause minor "spikes" to give the stock some life.

The top period is the shortest of all of them, usually. It's the peak of the stock's price in the cycle, and usually it involves heavy, choppy price action as well as heavy volume. This is when the stock is changing hands from strong to weak, and this is where most public investors finally decide to get involved in the stock...pretty much a day late & a dollar short.

The drop period is also a pretty fast one. You know the old saying, "the bull goes up the stairs but the bear goes out the window", meaning that a stock drops usually twice as fast as it rises. This is just the nature of human beings...people want to jump on the bandwagon, but it takes a while to get that going, while when it's time to bail out, people will do it in droves. The drop is also known as the markdown period, where basically the uninformed investor is left holding the bag.

Ted Warren stated in his book that "the odds will be weighted heavily in your favor if you buy a stock after a low price range or base of several years, especially after it has turned extremely quiet for many months". This is a true hallmark of base activity, or accumulation activity.

What I have found is that the base period can vary based on what type of stock you are trading. If you are trading the higher priced blue chip stocks, the bases can be several years in the making, but when you're trading penny stocks, the same type of base action can be greatly shortened, but the results will be relatively the same. 

Again, these are timeless stock trading principles, and the strategies laid out in Ted Warren's book apply to virtually every type of stock that can be traded. When you finally realize that the markets are about human greed and human psychology, it takes the mystery right out of it. But before I get off on any realy tangents, I just want to encourage everyone out there to read more about these four phases; they are discussed at length in Part One of Ted Warren's book.