Technical analysis has its building blocks. To gain a full understanding stock charts, investors need to understand the building blocks that form the foundation for reading stock graphs.

The primary theory underlying all of technical analysis of the stock market is called Dow Theory. Dow Theory breaks down every bull or bear market into distinct phases with the goal being to identify the current phase so that the next move can be anticipated.

Dow Theory breaks down a bull market into three distinct phases.  Understanding these phases is a great way to make an educated guess as to how long the bull market will last from your vantage point.

Having the ability to understand where the market is within a bull trend at any given time provides the ability to make smart investing decisions

The three phases of the bull trend with Dow Theory are:

1. Accumulation

This phase occurs when the big money players start to act like the bear market is over.

The big players starts to slowly purchase stock at a discount from the public that has thrown in the towel, convinced stocks will never recover.

The market will start to move higher, but most analysts and traders will refuse to believe the bear trend is over.  This strong belief in the eternal nature of the bearish trend will cause the public to keep selling shares to the professionals who are buying.

2. The Big Move

The buying begins in earnest after the public realizes that the stocks are moving higher and gains confidence.

The public starts to buy  stocks, forcing the overall market higher at a rapid clip.

Good news  begins to sweep the news wires of how great the stock market and economy is doing

3. Euphoria

This is when the public goes crazy buying stocks.  You hear market chatter on the street and hot tips are filling  your E mail inbox.  Once the majority of traders start to believe that the market will keep moving higher, the professionals take profits, starting the cycle once again.

Action to Take:

Ask yourself what phase of the bull market is happening right now?