Major Trends Have Three Phases

The following is an excerpt from the book, “Technical Analysis Of The Financial Markets” by John J Murphy:

“[Charles] Dow focused his attention on primary or major trends, which he felt usually take place in three distinct phases: an accumulation phase, a public participation phase, and a distribution phase. The accumulation phase represents informed buying by the most astute investors. If the previous trend was down, then at this point these astute investors recognize that the market has assimilated all the so-called ‘bad’ news. The public participation phase, where most technical trend-followers begin to participate, occurs when prices begin to advance rapidly and business news improves. The distribution phase takes place when newspapers begin to print increasingly bullish stories; when economic news is better than ever; and when speculative volume and public participation increase. During this last phase the same informed investors who began to ‘accumulate’ near the bear market bottom (when no one else wanted to buy) begin to ‘distribute’ before anyone else starts selling.

Students of Elliott Wave Theory will recognize this division of a major bull market into three distinct phases. R. N. Elliott elaborated upon Rhea’s work in Dow Theory, to recognize that a bull market has three major, upward movements. In Chapter 13, ‘Elliot Wave Theory’, we’ll show the close similarity between Dow’s three phases of a bull market and the five wave Elliott sequence.”

Plenty of well respected and renowned market analysts have also talked about market phases and cycles. Jesse Livermore, Richard Wyckoff, William Gann, and Al Brooks to name a few. Each of these people, from Dow to Brooks, had slightly different viewpoints, but despite their differences they all managed to be very successful. Additionally, despite the slight nuances, they all sort of agreed that the major cycle happens in phases.

So why am I sharing this???

For me, keeping sight of what phase of the cycle the market is in has been of high importance. It can be determined first or it can be determined later, but in my opinion (and I’m sure the aforementioned masters would agree), it does need to be determined.

Something I’ve rarely talked about is moving averages, but imo, these are THE BEST tool to help keep sight of the overarching cycle. Sadly this indicator is misunderstood and gets used almost exclusively for stuff like “when x crosses y…”, etc., but they’re extremely valuable for me in my strategy and I use them in EVERY new market I enter. The more familiar I am with a market, the less I use them, but even then, I’ll still pull them up from time to time to make sure I’m connected to the phase and not looking to buy/sell at the wrong times.

Hope that info is valuable to someone👍