Over time you will be able to look at a chart of a stock and recognize what part of the business cycle it currently is. The business cycle is divided up into four parts or stages. During stage one; stocks should be monitored to make sure that the stock does not go any lower. The types of stocks to look for are ones that have been basing anywhere from four to six weeks. When these stocks are appear to be breaking out of this stage, forming a bullish trend along with our other indicators, we jump in and buy it!

It is during the stage two that a short term trader will take the “sweet spot” of profits out of the stock. Buyers, driven by greed and indecision, begin to purchase the stock at low prices. Position traders will ride the stock all the way to the end of a stock’s stage two. This process may take anywhere from weeks to years.

During stage three, step aside, and look for better opportunities. This is the part of the chart where the stock seems to base sideways, just like in stage one, and begins to fall aimlessly to the ground. Stage three is the point where buyers refuse to pay higher prices and fear begins to set in. Stocks fall about three times faster than they rise. As one can see, fear can be a very powerful ingredient in the steep decline of a stock. Just remember, there are thousands of stocks with numerous opportunities out there waiting to be played.

Stage four is the final stages of a stock’s decline. Here, you should again stay out of the way. Step aside and watch as others pour their money into a stock that they think they are getting a bargain for. Days later they run for the exits as their cheap stocks runs even cheaper, extinguishing those buyers that are left. Finally, the decline starts to wear off and more buyers come back into the picture. This begins a sideways basing pattern that will develop into a new business cycle.