Ajitansh Kar, Gurugram, 5th November 2022
A stock’s movement is very similar to that of the growth of a human. The way a human transitions from an infant to an adult; stocks also move mainly in four cycles or stages. If one understands the way stocks move, they can benefit from it heavily and earn a good profit.
As stated above, stocks mainly move in four cycles – Stage 1 (Consolidation phase), Stage 2 (Advancing phase), Stage 3 (Distribution phase) and Stage 4 (Declining phase). These cycles keep on occurring from time to time for every stock and offer a chance to the trader to earn money if these cycles are interpreted at the correct time. To understand these phenomena more accurately we will look and interpret the candlestick chart of the company – Computer Age Management Services (CAMS). CAMS is a popular IT management services company which acts as a mutual fund transfer agency serving several Indian asset management companies. The company debuted its IPO (Initial Public Offering) in the month of October in 2020.
As seen above, the stock formed a beautiful IPO base and subsequently gave a breakout, which was a great opportunity to trade in the stock. Those who missed this breakout, got many more opportunities in the future as the stock climbed higher and higher and formed subsequent bases. Missing breakout at a particular base should not create FOMO (Fear of Missing Out) in the mind of the trader because, if the trend of a stock is intact, the trader will get many opportunities along the way to trade in the security.
The stock, after breaking out from its IPO base, immediately went into a period of consolidation and entered Stage 1 or the accumulation phase. This phase generally occurs because large institutions or the big money have certain information about that particular stock which might not be available to the retail investors and are hence accumulating, which results in consolidation. In this phase, the volumes are generally lower and it kicks back in again when the final breakout of the base occurs. The drier the volume is during Stage 1; the better the chances are for a strong breakout to occur.
After the breakout occurs on the chart, CAMS aggressively moves into stage 2 or the advancing phase. During this time, the stock rallied to make new highs and gave a staggering 106% return in a matter of just 94 trading sessions. Stage 2 is also called the trend phase and helps traders make money by simply holding onto the trend or by trading the breakouts of the subsequent bases formed during this stage. Remember, if a stock makes a fourth or fifth base during stage 2, the likelihood of the breakout decreases and the chances of the stock entering Stage 3 increases.
As stated earlier, CAMS advanced 106% in stage 2 while forming 4 bases. The breakout at base 4 failed and CAMS entered into Stage 3 or the distribution phase. In this phase, generally, people who were long on the stock unwind their positions and hand it to the novice retail. This stage should alarm the trader to book his longs and search for other opportunities in the market.
After completion of Stage 3, CAMS broke down its major support area of 2900 and moved into Stage 4 or the declining phase. The stock tumbled down almost 30% shattering the hopes of the retail investors who purchased the stock in Stage 3 in the hope of making hefty gains. Stage 4 is a great opportunity for bears to short sell the stock and earn profits.
CAMS after completing its four cycles, is now again in Stage 1 waiting to touch new highs. I hope that you now have an understanding of the cycles in which a stock moves and that it would help you to make better trading and investing decisions in the future.
