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The Three Phases of Market Activity and the Best Trading Strategies to Employ

Do you know the best trading strategy to use in today’s challenging markets? Do you know which phase of market activity we’re in right now? Most traders – including professional investors – don’t know the answers to these questions. In this article, I outline the three phases of market activity, then discuss the best trading strategy to employ for each phase, including Elliott Wave and other techniques. In addition, I recommend specific trading strategies for today’s current, difficult environment.

The three phases of each market are:

• Bottoming/Topping,
• Accumulation/Distribution, and
• Trending (up or down).

First phase of market activity: Bottoming/Topping

A major market top or bottom is rare and, by definition, lasts a long time. Therefore, you can’t have a major top or bottom every few weeks. Recognizing a market top or bottom can be difficult, yet extremely profitable if you’re right.

However, this phase of market activity is one of the most dangerous times to trade, because it can produce repetitive losses if you continually guess incorrectly. For example, in an expanding environment, a market can be in a topping phase, yet make minor new highs over and over without changing the fact that a top is forming. Unfortunately, many people trade as if major market tops or bottoms happen frequently, which is why they can end up losing so much money.

Second phase of market activity: Accumulation/Distribution

Since one is the mirror image of the other, let’s focus on Accumulation: After bottoming, the market may bounce off the low and experience a period of back-and-forth consolidation. This occurs because financially powerful traders are accumulating positions, preparing for the future market advance. While wealthy traders accumulate positions, less experienced, under-capitalized traders are selling into the retest of the market’s bottom, thinking the market will go lower. While a majority of traders are selling into the market’s decline, this “public activity” makes the Accumulation phase possible for a minority of wealthy traders to hoard large, Long positions. In other words, when the majority of traders are selling, the wealthy understand this is an excellent time to buy, and they have the “financial patience” to wait for the demand environment to change, forcing prices higher. In the Distribution phase, the opposite is true.

Third phase of market activity: Trending (up or down)

Continuing our discussion from above, once nearly all positions that can be bought have been purchased, the Accumulation phase is complete. Most traders are committed – they’ve laid their claim – and are now waiting for the market to move their way. During Accumulation, wealthy traders capture nearly all supply in the hope future demand will make their long-term commitment worthwhile. This sets the stage for the Trending phase of market activity. As the economy improves – as it always does – the public realizes the “end of the world” did not occur, so their willingness and ability to invest increases. Over time, growing public demand forces prices upward. (Remember Economics 101: Increasing demand coupled with limited supply creates higher prices.)

In comparison to the prior two phases, the Trending phase lasts the shortest time. Generally, it’s the most difficult phase to profit from, because most traders are uncomfortable entering a market well after the bottom since it’s obvious they’re no longer getting a bargain.

What are the best trading strategies to employ for each phase?

Bottoming/Topping – At market extremes, NEoWave or Elliott Wave trumps all other techniques, leaving little doubt what will happen next and what to do. Wave theory clearly portends market potential, allowing you to catch major market turns. Ironically, at such times, the public (and your friends!) will have the exact opposite market perspective, leaving you a “lone voice in the woods.” Consequently, profiting from Wave theory requires the ability to identify patterns and enter when multiple patterns simultaneously end. Identifying and entering at major market tops or bottoms makes most traders extremely uncomfortable. As a result, placing your trust in Wave theory at this time requires mental fortitude and the personal confidence necessary to buck the majority and take an unpopular position. Though it often appears contrary to “logic or reason,” following NEoWave (or Elliott Wave) during this phase of a market’s development generally offers the greatest possible reward.

Accumulation/Distribution – After a major top or bottom, a market will transition into a choppy period (above its low or below its high). Wave theory can still be useful at such times, but its usefulness starts to diminish. Instead, oversold and overbought indicators tend to be more useful, allowing you to “trade the range,” getting in or out at each market oscillation. The longer the consolidation, the longer you would initiate this strategy.

For example, let’s say you have interest in the Gold market. In this scenario we’ll assume Gold recently began rallying from the $900 level. As one who desires to accumulate Gold, you patiently watch it rally to $1,000, which in hindsight enables you to see the market created an important and obvious low at $900. That observation allows you to objectively implement your accumulation strategy. When Gold begins to pull-back from the $1,000 level, carefully watch your indicators for an oversold condition similar to what occurred near the $900 low. If that oversold condition occurs when Gold is around $950, it’s time to buy. If Gold later exceeds $1,000, you can decide to liquidate some of your position (noting the new high) OR simply wait for the next “oversold” condition to pick up even more Gold. This process can be repeated over and over every time the market exceeds the newly noted high.

Trending (up or down) – As I discussed in my previous interview, this market phase can be random and unpredictable. Here, Wave theory is least useful. During the Trending phase, it’s best to do what most people are afraid to do: buy into market strengths. Keep in mind, strong market trends are not common, especially those in which you can buy into a new high or sell into a new low. When strong market trends happen, they can yield tremendous return in a very short period, far outweighing results you might get from other market phases.

While it’s clear when a market is trending, a safe, low-risk entry may be difficult to identify. So, what do you do? To explain, let’s continue our Gold market example: Gold bottomed at $900, rallied to $1,000, then sold off to $950. If the Accumulation phase has ended, Gold will next move into an uptrend. This is when the “scary” buying-into-highs strategy actually works. In our example, you would place an order to buy Gold at $1,001; if activated, your stop would be just below $950 (say $949). This way, you are “going with the flow” of the market, letting it identify your specific entry and stop points as it progresses. When implemented at the right time, this strategy produces the greatest profit in the shortest period.

Which phase is the U.S. stock market in now and which strategy should you use?

After rallying significantly off its 2009 low, since January 2010, the stock market appears to be in its Distribution phase. As a result, your focus should be on “selling into strength” as the market forms a top over the next few months. In this period, overbought indicators work best. Sell into overbought conditions on a Daily or Weekly basis with stops above this year’s highs. Lighten-up on shorts when your indicators suggest the market is oversold, but pay careful attention to when the market no longer bounces off an oversold condition. That is when it’s best to remain Short in preparation for the coming downtrend. Most important, focus on protecting capital, select trades carefully, and avoid big, risky bets.

I’m starting from the recent (inverse) correlation between equity and the dollar. Well, even if it seems to have lost strenght, you can see how the last rally in equity was anticipated by a strong rally of euro against dollar. So i’m going to make an elliott count of EurUsd from the jun6th low. this is the graph:

so, i identified this as an ABC correction, as you can see the detailed labeling. Then, we can go to analyze wave C of this correction, and we know that wave C are impulsive.

ok, so i think we are in wave 5 of C, so we can try to spot an impending reverse. This wave 5 is assuming the shape of an ending diagonal. Why i think this is an ending diagonal? Because 1) they are usually at the end of a move, in wave 5 position 2) inside ending diagonals, wave i is longer than wave iii and 3) waves in ending diagonals overlap and sometimes wave i assumes the shape of a three.

i assume point 1) is correct in my count (hey, this is my assumption! ); for point 2) wave i is actually 175 pips and wave iii between 110 and 150 pips (it depends where we assume that wave iii ends; for point 3) you can clearly see it in the graph.
Ending diagonal usually ends with a throw-over, a fake break of the upper trendline. it seems it made it today, but i think it’s not enough and i assume it will throw-over tomorrow morning for these reasons:
- wave C equals wave A near 1,2750.
- wave v of 5 of C is too short (less than 100 pips)
- equity seems to be in wave v of an impulsive move, so if the correlation holds, we’ll see them move up together and then suddenly drop. Why suddenly? beacuse when the lower trendline of an ending diagonal is broken, prices tend to move quickly toward the beginning of the diagonal, and in this case this point is at 1,2492.

Then i take a look at the recent rally in equities and it seems that S&P500 can be counted this way:

so what i’m sayng is that early tomorrow both ES and euroFx could move up, with Es towards 1080 (area where wave 5 would be equal wave 1) and eurofx toward 1,2730-1,2750, for what this area represents as i explained before. Then, a sudden move down of eurofx and the start of a reversal for ES.
(if you look at the graphs, you can see that however every “condition” is satisfied and both counts could be complete, so prices could go down immediately. but i don’t think this is the case)

Ok, this could be my fervid imagination, and it seems too perfect to be true and working. But i’ll trade this plan (and old say: paln your trade, trade your plan) and if it works, i’ll can tell i called it before, and for you only

have a nice trading day tomorrow
mdm

This is the weekend analysis that my premium subscribers received.  That is the question! I can make a case for either scenario, but the most recent data that ES has been giving us is Bearish. Not because the market is going down, but because the structure of the market is Bearish. The charts below make the case for neither scenario, but rather presents both as possibilities and indicated important levels to my analysis. As the market unfolds, more information will be welcome and useful in projecting the intermediate-term path of ES. The first chart is the Weekly Big Picture. It’s primary use is to give us an overarching view of the market so we don’t get lost among the trees. The second chart is more relevant to our trading on Monday. Sometimes I learn more when my projection is not followed by the market. It tells me to reconsider my opinions.

The Weekly chart below shows general paths that are possible for ES. Because I am short-term Bullish for Monday’s trading, I favor the short red arrow up for Monday. The next chart shows the possibilities for the short-term.

The next chart is more relevant to our trading on Monday. Be sure and review recent posts, since many are still relevant. I still have, in the back of my head, the 1150 level as a destination which would make a nice right shoulder on the Daily chart. That would be at approximately the 62% retracement level, and ES has already hit the 50% retracement level and reversed. Right now, it looks on the Daily chart like ES wants to make a right shoulder, but had this shoulder beaten with a 2 X 4. As I mention on the chart, the 1150 level would make for some interesting possibilities ~ Bearish and Bullish. The most notable Bearish indicator is the structure of the rally from the correction low of 1038.50 which looks corrective (overlapping waves). This could be an ABC or an ABCDE. But that doesn’t rule out the possibility that it is simply ES forming a base from which to rally.

We don’t provide a day trading system. I am a probability trader that has modified a system that gives you an opportunity to learn to fish. The value we provide is in understanding setups and managing risks. However, there are times when I will give you a fish and other traders here will do the same. Also, please remember that this is about probabilities, not certainties.

My goal would be an “Elliott Wave for Dummies” curriculum. I love all the “for Dummies” books because they strive to simplify and clarify. They are profoundly simple. The mark of a good teacher IMO is someone who can get the hay down from the loft so the horses can eat it. Many teachers like to complicate their subject matter so they can appear “smart”. I have no use for insecurity in teachers. The old saying that “it’s better to teach someone to fish than give them a fish” is never more true than in teaching.

To that end, the best way to see what we do on a daily basis and on an intraday basis is to try our Premium Content. If this site doesn’t add back more than the price of admission, then you have no obligation to subscribe after one month, and you will have still learned some Elliott.

If you like what you see here, wait to see how MortiES’s analysis can assist you in your everyday investing or trading strategy! Go ahead, check out my track record and click on “Subscribe to MortiES Premium” and give it a try! I am offering a 30 day free trial period

This first Chart is my EOD analysis that was posted on 8 June 2010. My primary scenario was the Bullish path depicted by the blue arrows. These arrows were drawn to indicate typical market direction and action for the next day. The first arrow up indicated that I thought the market would make a little headway before correcting into a buy-the-dip setup. Then I expected a significant rally into the EOD.

The chart below is the market’s action the next day with the arrows superimposed. Not perfect, but I’ll take that call all day long!

We don’t provide a day trading system. I am a probability trader that has modified a system that gives you an opportunity to learn to fish. The value we provide is in understanding setups and managing risks. However, there are times when I will give you a fish and other traders here will do the same. Also, please remember that this is about probabilities, not certainties.

My goal would be an “Elliott Wave for Dummies” curriculum. I love all the “for Dummies” books because they strive to simplify and clarify. They are profoundly simple. The mark of a good teacher IMO is someone who can get the hay down from the loft so the horses can eat it. Many teachers like to complicate their subject matter so they can appear “smart”. I have no use for insecurity in teachers. The old saying that “it’s better to teach someone to fish than give them a fish” is never more true than in teaching.

To that end, the best way to see what we do on a daily basis and on an intraday basis is to try our Premium Content. If this site doesn’t add back more than the price of admission, then you have no obligation to subscribe after one month, and you will have still learned some Elliott.

If you like what you see here, wait to see how MortiES’s analysis can assist you in your everyday investing or trading strategy! Go ahead, check out my track record and Click on “Subscribe to MortiES Premium” and give it a try! I am offering a 30 day free trial period.

Or just click the “Sign Up” button below!

What looked like a single day wonder (Dow +284 pts) has turned into a trading range over the last week. This could be minor wave 4 of Major I  of V down! Markets are waiting for economic confirmation -one way or the other. Friday may give us just that.

Economic news today was uniformly bland.  Monthly employment may turn out, much ado about nothing – Government hiring is only temporary and the Challenger Grey hirings were below expectation.  When was the last time that 450K newly released into unemployment was EVER a postiive figure. As the summer progresses many analysts will begin to downgrade earnings estimates for the fall.  Tis the season.

This is my 26May2010 EOD post with analysis for the upcoming session. Analysis was done with a combination of Elliott Wave and typical Fibonacci relationships. As I stated in my post, I was fairly confident in this projection, but once ES got to the upper target, I felt that there were two scenarios possible. But for the next day, I was confident with my analysis. We had some other good calls this week, but this was my favorite.

The chart below is the path that ES took up until the close of trading the next day. I overlaid the arrows on the chart, and as the chart shows, this move was nailed.  A 50 point day makes a difference to any trading account.

We don’t provide a day trading system. I am a probability trader that has modified a system that gives you an opportunity to learn to fish. The value we provide is in understanding setups and managing risks. However, there are times when I will give you a fish and other traders here will do the same. Also, please remember that this is about probabilities, not certainties.

My goal would be an “Elliott Wave for Dummies” curriculum. I love all the “for Dummies” books because they strive to simplify and clarify. They are profoundly simple. The mark of a good teacher IMO is someone who can get the hay down from the loft so the horses can eat it. Many teachers like to complicate their subject matter so they can appear “smart”. I have no use for insecurity in teachers. The old saying that “it’s better to teach someone to fish than give them a fish” is never more true than in teaching.

To that end, the best way to see what we do on a daily basis and on an intraday basis is to try our Premium Content. If this site doesn’t add back more than the price of admission, then you have no obligation to subscribe after one month, and you will have still learned some Elliott.

If you like what you see here, wait to see how MortiES’s analysis can assist you in your everyday investing or trading strategy! Go ahead, check out my track record and Click on “Subscribe to MortiES Premium” and give it a try! I am offering a 30 day free trial period.

Or just click the “Sign Up” button below!