Moving averages can be employed to define the four major stages of the typical market cycle (see Chart 3.4). This identification leads readily to logical portfolio strategies that accompany each stage.
Chart 3.4 shows the four stages of the market cycle: rising, topping, declining, and finally basing for the next Stage 2 advance. As you can see, during Stage 2 advances, prices mainly trend above the key moving averages. During Stage 4 declines, prices mainly trend below the key moving averages.