Yesterday we talked about the accumulation phase, a period of consolidation in the markets. Today we are going to talk about a trending phase: The run-up phase. This is the best phase for new traders to make money if they learn and master the correct setups. Today we are going to talk about all of the characteristics of this phase, and how you should trade to make money during this market cycle.
The Run-Up Phase
The run-up phase is a strong, uptrending market. This is a great period for momentum traders like us. Trend brings momentum and volume in the market, which means there is a lot of money to be made. Once a market comes out of the accumulation phase, a whole new set of buyers is entering the market. You will see high relative volume during the early stages of this period as the market begins an uptrend.
There is a lot of demand for a limited supply of an asset during this period, and as a result, the asset price begins to appreciate in value. Moving averages start to slope upwards, the market breaks key resistance levels, and we see a consistent set of higher highs and higher lows on the chart. Short sellers rush to cover to avoid getting squeezed, and breakout buyers rush to buy before the price increases. The sentiment is very optimistic around the market.
How To Trade This Phase
This is the easiest time for new traders to make money. This period is the playground for momentum traders. You will see great volume patterns on upward price movement, followed by low volume consolidations or pullback. All of the short sellers who do not understand the market cycles get smoked in this period. They usually blow up their trading accounts as they keep going short against a strong uptrending market. Breaks of support are often fake outs to suck in short sellers and work out weak buyers.
During the run-up phase in the market, dips are viewed as buying opportunities, not signs of weakness. Breakouts tend to follow through strongly. When the market gaps down, it will often get bought up and continue trend. When the market gaps up, often two things will happen: It will gap up and rip, and continue its trend. Or it will have a gentle selloff, pullback to retest resistance, and then continue on the uptrend. This is the time to trade with large size when you are swing trading.
This phase is good for day trading, but even better for swing trading. In the later stages of the run-up phase, the market can lose some range and volatility as it continues to just grind up slowly each day. But for swing trading, this is perfect, as you know that time is on your side and you just need to respect your risk and hold through dips against your position.
This is the SPY daily chart from early 2016 to early 2018. This is a perfect example of a strong, uptrending market. Every major dip and gap down was bought up strongly. July 2016 during Brexit. November 2016 during the US elections. Every time we broke support and looked like we would sell off, the market would just reverse and continue higher. The market is a continuing series of higher highs and higher lows.
In tomorrow's article, we are going to talk about the next phase in the market cycle when the run-up ends, which we have seen this year: The distribution phase.
If you missed yesterday's article about the accumulation phase, you can check it out here.
Free Live Trading Webinar on Nov 20th and 21st
Wondering how to profit when the market crashes? We are doing a free workshop analyzing all the market cycles of the stock market in even more depth, which sectors you should be trading, and the best setups to use in a bear market like the one we are in now. On the 2nd day you can watch me day trade live and see exactly how I trade and profit in the current market conditions.