What is a Market Cycle?
Market cycles are the trends or patterns that may exist in a given market environment. Short-, medium- and long-term market cycles can be distinguished, with smaller market cycles being part of larger cycles. All markets are cyclical. When one cycle ends, the next one begins.
Regardless of the time frame and the market, the cycle is characterised by four phases: accumulation, bullish phase, distribution and bearish phase.
Details of the 4 phases of the market cycle:
Occurs after the market has had a period of downtrend, sometimes prolonged. Now the market stops falling and starts to move sideways. While there is some fear and distrust, overall market sentiment begins to change from negative to neutral. That is to say, the selling strength is diminishing and the buying strength is increasing.
This occurs after the market has been stable for a period of time (the sideways movement it had in the previous phase) and is starting to move upwards, giving rise to the uptrend. Market sentiment generally moves from neutral to bullish, and then as it progresses, to euphoria (greed prevails). The euphoria occurs because the majority of the market sees that it really was an uptrend (at the beginning few enter, with distrust) and they enter pushing prices higher and higher and very quickly, but by this time the bullish phase is well underway.
Occurs after the market has been euphoric, it is the same as the accumulation phase with the difference that it occurs after an uptrend. Now the selling strength begins to dominate and prices are usually locked in a range or sideways. The bullish sentiment of the previous phase becomes a mixed sentiment. There is a balance between supply and demand.
Occurs after the market has been sideways in the distribution phase. As there is more selling strength than buying strength, prices start to fall, resulting in a downtrend, breaking the previous sideways movement. Market sentiment is bearish. Once this phase is over, it will move to accumulation and the latter will start an uptrend and the cycle will start again.
Here we use the example of the SPY on weekly candles, where you see the phases from a few years ago. As you can see, the accumulation starts, then the bullish, then the distribution and finally the bearish. After that, you can see that there is accumulation again, and the cycle repeats.