We have already stated in previous articles that the market moves following the trends, these are essentially of three types:
- Primary Trends
- Intermediate Trends
- Short-term Trends
Knowing how to analyze these three types of trends means being able to recognize at what point in the economic cycle we are. The business cycle consists of a primary uptrend (bull phase) and a primary downtrend (bear phase), the two trends have a duration of two years, of course, the duration is statistical, so there may be longer trends, but hardly shorter.
MAXIMUM AND MINIMUM RELATIVE SUCCESSION
Every trend has a series of maximum and minimum, the minimum represents the end of an intermediate trend and occurs statistically, twice for each half cycle, there may still be the primary trends that have more intermediate trends, but, as said before, ever a 1/2 cycle contains less than two trends intermediate.
The main feature of the first half cycle (bull phase) is related to the succession of peaks and valleys. In a bull phase the previous maximum is always less than the next one, when this does not occur, ie, when one of the maximum does not exceed the previous one, reaching to a lower price level, then, most likely we are faced to a primary trend reversal, in this case by a bull phase to a bear phase.
STEPS THAT DIVIDED THE CYCLE
At the peak of the economic cycle does not occur a sharp reversal of the trend immediatly, but there is a phase of variable duration, in which the price takes on a side (maximum and minimum are the same or almost), in this particular phase, the investor oriented for long period often tends to observe the market in the expectation that the lateral phase is interrupted by bringing the price to define the new trend, which, in this case, will be bearish (bear phase).
INTERMEDIATES MOVEMENTS: SOME CHARACTERISTICS
An intermediate movement always occurs within a primary trend, this movement represents a phase in which the price becomes a dominant trend opposite to the main trend. This phase lasts statistical ranging from 6 weeks to 9 months. The price, during the intermediate phase, retraces for 1/2 or 1/3 the previous trend, if the movement falls below the value reported very probably is experiencing a reversal, it should be however taken into account, for the purposes of a correct and rational analysis, also factors such as: the duration of the intermediate trend; the duration of the primary trend in place; the characteristics of the movements of the short term.
WARNING: Investing in lateral phases of the market, both at the peak of a cycle and at the end of the same, is very dangerous, it would be better wait until the primary trend has already formed and has passed the previous minimum of the previous phase.
INVESTING IN INTERMEDIATE MOVEMENTS
Investing in intermediate movements can be very profitable, especially if you have a global view of the business cycle and when you consider the short duration of the intermediate cycle. Obviously the important thing is not grasping the minimum or maximum of a cycle intermediate, but that you invest when this has already formed and that you close the investment position in proximity of the end of the intermediate movement.