Putting the 4 Stages of Market Development together with the 7 Stock Market Patterns/Events

Over the last month we have gone over the 4 stages of market development; the boom bust cycle that rules the markets and the economy. Now we are doing a deep dive into the patterns that make up the markets. These 7 Stock Market Patterns or Events are the components that make up the market’s full range of motion. These 7 variations make up everything that the market can throw at you.

In this example, we see the uptrend that gets temporarily paused with a consolidation back to the uptrend line. The uptrend resumes as a breakout pattern which moves higher only to consolidate and falter. This leads to a violation of the uptrend line, and when that uptrend line is broken, it subsequently leads to a breakdown followed by a downtrend.

Above, we can see the 7 stock market events put together in their proper sequence.

  1. Sideways trend: Starting the Market Cycle.
  2. The break out: Notice the lows start to ascend and the consolidation gets tighter just before the breakout.
  3. The uptrend: It clearly makes higher highs and higher lows and finally gets extended to the upside. At this point, everybody is talking about the stock market and people who may not normally do so are getting involved as the market makes shallower new highs. This finally leads to a giant move up, but then gets a sharp correction that leads to the next event.
  4. The uptrend line break: Notice that the uptrend does not end right away and it has a number of subsequent rallies. Each rally then fails only to lead to another significant new high. Each sharp rally then leads to a sell-off. In this example, the sideways trend at the top of the cycle (Stage 3) has four sharp rallies; each followed by an equally steep decline.
  5. The break down: Multiple rejections or attempts to move higher finally lead to a breakdown.
  6. The downtrend: This is where the market is controlled by fear. Each low is followed by another new low. Finally the lows get so extreme that sellers capitulate and buyers come back in.
  7. The downtrend line break: The end to the 7 stock market events which now circles back to the beginning of these events. At this point, most stock market participants have lost lots of money and don’t care what the markets are doing. Retail investors are generally ambivalent to what’s going on in the financial markets and we find ourselves back in a sideways trend.

The Market Cycle is Complete with all 7 Key Components

We have gone full cycle and the Market Cycle is ready to repeat. Please note that the period of uncertainty and ambivalence will last a long time. This will need to go on for so long that it becomes boring and most people will have forgotten about the last crazy market cycle.

Keep an eye out for our next blog where we will discuss accumulation and distribution and how they correlate with support and resistance.

Trade well everyone.

Written by Michael DiGioia, Director of Institutional Sales
Mike is available for One-on-One Coaching. Learn More