Phases of a Stock Trend
Stocks go through four phases. Phase one is accumulation when institutions establish positions. This is followed by the markup period where traders and investors bid the stock price higher. The peak comes at some point as earnings may disappoint or the stock starts to see the bad press, this is the distribution phase. Finally comes the markdown phase where prices can fall quickly. With most strong companies, the process starts all over again as institutions feel confident the stock or company has run its course. They start accumulating shares again.
What phase are we in now?
We’ve written about the indices for the past few weeks, concerned about price action at all-time highs (ATH). We felt a breakdown was imminent into the end of January trading and that would eventually give us the next direction. At the end of January, indicators were severely overbought. As a result, we were taking profits into highs assuming Phase III distribution could start soon. The result was a quick flip to Phase IV Markdown (red shading), with only a few days of distribution.
We appear to be in Phase I – Accumulation. Unless something changes dramatically and some catalyst appears, prices should stabilize further. With the yield curve flat, that generally means we could see more upside, or in this case we should see more stability.
Note NYSE stochastic indicator is in the green zone and MACD is attempting to trend higher.
Phases of a Homebuilder Stock
LHI Homes (LGIH) is an IBD50 candidate and a recent swing entry that exhibits phases clearly.
- Phase IV Markdown is apparently complete (red shading)
- Phase I accumulation was brief as price action changed direction during the second week of March.
- The quick change has led to Phase II, “The Markup Period”, green shading, which leads us back to the longest period in a stocks evolution.
- Note the previous markup period, green shading in the latter part of 2017. LGIH moved from 45.00 to 79.55 in three short months.
With RSI rising and MACD above its signal line, above average volume suggests a confirmation of phase II underway. Look for LGIH to continue to break above recent pivot highs in the short term.
Now check your stock for “phases”. Where is your favorite candidate in its present evolution?
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