1. Stage one involves the distribution phase and it marks the the beginning of a bear market. Now real analysts feel that environment is not conducive for business and thus they sell stocks. Only great analysts are able to figure out that bear phase has started whereas general public is feeling happy buying at low prices. Reaction rally occurs in this bear phase and it is able to retrace a portion of the decline. This rally keep bulls in high spirits where it again dies down.2. Stage two involves clear identification of a down trend and thus business conditions is at its worst and thus sell off continues.
3. Stage Three involves a high level of despair and thus all hope is lost.Corporate news is bad, the economic outlook bleak and not a buyer is to be found. Now a reversal takes place as stocks fully reflect the worst and again uptrend starts.
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