Market tops and bottoms
The market has 4 stages. Stage 1 basing phase. Stage 2 bull market. Stage 3 topping phase, and Stage 4 bear market. If you bring up the major indexes you will see this pattern repeat over and over again. Stage 1 and stage 2 phase are the best times to be invested. You want to stay in cash during the stage 3 topping phase,and short the market during stage 4 bear market. On a regular chart, a bear market is usually confirmed as the price fall under the 200 sdma.
There's no way of picking exact tops and bottoms of the market, but there are always warning signs. For example, during a stage 3 phase in a stock market, you will start to see deterioration in the various sectors that comprises the stock market. As the major indexes continues to chug higher and higher, in the shadows, if you look closely, you will see that an increasing number of sectors start to underperform the major indexes. However, during these time market leaders, the high flyer and the tech stocks will continue rising, fooling the investors that stock market will continue rising. People are overly bullish in the stage 3 topping phase. Sometimes, you will see parabolic moves to the upside that is followed by a severe crash. Every bull and bear markets are a little different, so don't try to look for exact fits.
Another way to recognize the topping phase is to recognize distribution. This is the phase where smart investors unload their positions to the public. This is most recognizable by large volumes on the sell. During the basing phase, you want to see the price trade sideways and the BBs start to tighten. A good way to spot accumulation from the smart investors during the basing phase is to look at the buy volume and the money flow index. You will often see large buy volume admist the selling. Don't try to guess exact bottoms and tops, you will end up losing your shirt. Wait for things to roll over or break out or trigger a trade signal that you have thought out and planned.
After a security has undergone a declining phase or a bear market. The selling pressure starts to die down and start to trend sideways. What's happening during this phase is that the buyers and sellers are starting to move into equilibrium. Volume usually dries up during this phase. The buyers who are stepping in during this phase are not demanding any price concession and cheaper prices. This is a very favourable indication. during the basing phase you will see the moving average start to flatten out and the bollinger bands start to tighten. A lot of people will try to catch bottoms during this phase, but it's not wise to buy just yet. You could end up being frustrated as the security trade sideways will little price fluctuation. It's better to wait for the security to breakout of the base.
Advancing Phase, Bull market
The ideal time to buy is when a stock finally break out of its base into this more dynamic stage to the upside. In the stock market, look for a breakout above the resistance zone of the base and above the 30-week MA on significant volume. Most breakouts retest their breakout point before lifting off. The optimal buy point is either on the initial breakout or on the later pullback toward the breakout level. At this stage, a lot of people are bearish, and they will try to talk you of it by pointing towards bad fundamentals. After some time, the fundamental start to improve and more and more investors belatedly jump on the bullish bandwagon.
Nothing rises forever. Eventually it will start to roll over. In the stock market this take the form of the stage 3 topping phase. What's going on is like in the basing phase the buyers and sellers are once again about equal in strength. The difference is that it happens after an uptrend. In stage 2, the buyers were much stronger than the sellers. Now, the advance is ending, and the stock is shifting towards equilibrium. At this stage, in the stock market, you will start to see sector deterioration, and a large percentage of the sectors start to underperform the major indexes.
Declining Phase, Bear market
This is a period, when the buyers finally give in to the sellers. The buyers become fatigue and become overwhelmed by the pressure of short sellers and fearful sellers liquidating their positions. In the stock market, look for a breakout below the support zone and below the 30-week MA. Unlike an upside breakout, which needs an impressive increase in volume to be considered trustworthy, a downside break into stage 4 doesn't need such a huge increase in volume to the downside to be valid. The security can fall on its own weight. It is during the basing phase when the start money and pros accumulate, and during the topping phase when the smart money unload their position into the market chasers and bag-holders. Look at the second picture, and see if you can identify these different stages on your own.