The phases that characterize the bull and bear markets are as follows:
- Bull Market
This type of market is produced when the advance of prices reaches a level higher than the previous advance. Likewise, when no secondary trends become established below the latest peak. We can identify three phases in a bull market:
- Accumulation phase: At this stage falls occur in the market as the investors sell because the economic news are mostly negative. There is a moderate activity that begins timidly to recover.
- Recovery or expansion phase: In this case the activity begins with a modest progress and it produce a shy rising in market prices.
- Distribution phase: There is great activity in the market. There are major upward movements in market prices and trading volume and investors take long positions without objection.
- Bear Market
A bear market is when every drop of the price is reaching new lows and some upside corrections are not achieving the top levels of the previous correction. The phases are the same as in bull markets.
- Distribution phase: This is the last stage of the counter-trend, in this case, the upward trend. The volume is still high, but tends to decrease in their recoveries.
- Panic Phase: The selling pressure is far superior to the buying pressure. Prices drop dramatically and speeds up the bearish movement. Secondary bullish reactions (corrections) are often produced.
- Third phase: The sales continue. The reports are very negative and continuing the general decline in prices, but the movement is less violent than in the beginning of the previous phase.
To confirm and follow the market trends we can use the following principles:
Principle of ConfirmationWe can only get a confirmation of the trend using at least two moving averages, instead of one. That is, all moving averages must be in an uptrend in the case of a bullish trend or in a downtrend for a bearish trend.
The volume moves with the trendIf the market is bullish, the volume will increase with the price increase and decrease with the decrease of the price.
The sideways markets replace the secondary trendsA sideways market consist in a lateral move in prices that can fluctuate without trend. It may take several weeks or even months. Its meaning is that the forces of supply and demand are balanced. A break upwards or downwards of that line indicate an increase in the strength of the buyers or the sellers.
Only closing prices are usedIt is recommended not considering either the maximum or minimum of each session.
The trend is valid until a final confirmation of the change of direction is produced
Until at least two moving averages (or other trend indicators) do not confirm the trend change, the previous trend is still valid, although the prices indicate a contrary conclusion. This principle is a warning to avoid premature changes of market position.