Unlocking Market Cycles: Sector Rotation, Price Trends and Investment Strategies Explained

Hello, everyone!  

I’m thrilled to join you all at Diamond Ridge Financial Academy as we dive into cutting-edge investment strategies together.  

Let’s unlock the potential of quantitative trading and embark on a journey toward effortless and profitable investing!

Last night, we reviewed recent trading activity, covering everything from fundamental analysis to technical analysis, from individual stocks to forex and crypto markets. Diamond Ridge Financial Academy not only provides an online platform for learning about investments but also offers real-time trading guidance. Through last week’s lessons and trades, you’ve probably realized that investing isn’t as complicated as it seems. By understanding the basic rules of market behavior, you can achieve consistent profits. Whether it’s stocks, forex or crypto, every market follows its own logic and patterns.  

The Diamond Ridge Asset Management quantitative trading system is built around these market patterns, offering a wide range of effective strategies. This week, I’ll dive deeper into price movement rules to help you understand how the system works.

The rules governing the movement of everything in the market may appear complex but are actually based on shared logic. Understanding the direction of price movements is key to investing. Price movements can only be three types: down, sideways or up. Real profits come from the price changes that occur when trends shift direction. Tonight, we’ll study the patterns of trend reversals and use the 21-day moving average to identify these turning points, helping you seize more opportunities.  

Before we begin today’s session, let’s quickly recap the current market situation.

Today, the UK stock market experienced a rebound, with the FTSE 100 index rising by 0.52%. In terms of sectors, the industrial metals and mining sector, along with oil and gas producers, led the stock index higher. On the individual stock front, 996 stocks on the London Stock Exchange saw gains, surpassing the 833 that declined, while 599 stocks remained flat. Specifically, the energy sector, which dropped last Friday, saw a sharp rebound today, driving the FTSE 100's rise. On the other hand, sectors that had risen last week, such as biotechnology and electronics, showed signs of correction. In particular, news that Nvidia is under renewed investigation by China’s market regulators caused panic selling among tech stocks.

Looking at today’s market, we can see a rotation in the upward trend. Among sector indices, tech stocks in aerospace, defense and other fields, which led last week’s rally, started to pull back today. Meanwhile, stocks in the quantum tech sector which had been adjusting last week, began to recover today.

It’s also worth noting the differentiation within sectors. For example, in the crypto related tech stocks, companies like Coinbase Global (CION) and TeraWulf (WULF), involved in exchanges and mining, saw declines today, while companies in the big data and digital assets space like C3.ai (AI) and Innodata (INOD), saw gains.

Why does this rotation trend happen in the market? What investment rules are hidden within it?

Behind market rotation, there is an underlying law and driving force of capital movement. Capital, like flowing water, circulates between various sectors, chasing value gaps and potential growth points. By analyzing this phenomenon, we can see that factors such as hot sector switches, industry development stages, market expectations and emotional fluctuations all work together to drive this process. By understanding these rules, investors can better seize market opportunities.

First, the rotation of funds in the market is essentially a continuous redistribution of opportunities. One of the core drivers behind this phenomenon is the market's chase for "hot sectors". Whenever a sector shows significant growth potential, it attracts a large influx of capital, causing the prices of related assets to rise rapidly. For example, artificial intelligence has become a major focus for investors in recent years. Breakthroughs in generative content, intelligent driving and medical innovations have led the market to see disruptive applications in these areas. As a result, large amounts of capital flooded into the sector, driving stock prices up, creating a buzz.

However, over time, market capital begins to shift to other sectors, such as quantum technology. This is considered an important direction for the future of tech and the development of AI also provides a new driving force for quantum technology. Consequently, quantum tech stocks started to rise, attracting more investor attention.

This phenomenon is like a chain reaction. Once a sector is heavily favored by market capital to a certain extent, its heat gradually fades and capital begins to look for new opportunities. For instance, in the development of AI, quantum computing began to emerge as a new hotspot because of its potential in algorithm optimization and encryption. This rotation is not driven by a single force but rather the result of the technological synergy between AI and quantum computing. The increasing complexity of AI algorithms demands more computing power and quantum computing offers a potential solution to this bottleneck, attracting capital into the quantum tech field.

New hot sectors are often those with high growth potential, good market expectations and strong policy support. Sectors that are linked with existing popular sectors are more likely to attract capital. A breakthrough in one sector’s technology can drive growth in related areas. The development of AI not only promotes its own industry chain but also provides new growth momentum for fields like quantum technology and data analysis.

For example, breakthroughs in AI technology in image recognition and natural language processing have provided new applications for quantum computing, driving the growth of quantum science and technology. By identifying these potential connections in practice, investors can better capture the next investment opportunity.

Next, the development stages and market expectations of different industries and sub-sectors directly influence the flow of capital. This is like a dynamic market where funds flow into the most promising "low-lying" areas. Mature industries, though relatively stable, may have limited growth potential. For example, crypto mining and exchanges have entered a relatively mature phase and market expectations for their business models and future growth are becoming clearer. In this situation, investors are more likely to choose rapidly growing emerging sectors like big data and digital asset management. Big data is currently in an explosive growth phase and its penetration across industries is increasing rapidly, bringing vast development prospects to related businesses.

Policy support and technological progress are important external factors driving capital flow. In recent years, major global economies have been actively promoting digital economy-related industries, injecting new growth momentum into the market. For example, US President-elect Donald Trump appointed David Sachs as the first White House crypto and AI head, marking a significant step in the US in developing emerging tech policies. The US is preparing to overhaul its digital asset and AI policies, which will directly boost the valuation of such assets. Additionally, technological progress provides clear investment directions, such as the development of distributed computing power technology, which supports the infrastructure for digital asset management and attracts large inflows of capital.

Finally, the volatility of market sentiment also plays a significant role in the rotation phenomenon. When market sentiment is optimistic, investors’ risk appetite increases and funds flow into higher-risk, higher-return assets, forming a multi-sectoral rotation. On the other hand, when market sentiment is pessimistic, funds tend to concentrate in a few low-risk assets, such as government bonds and gold which are considered safe havens.In this case, the rotation may weaken, but the concentration effect of funds becomes more prominent. For example, when the global economy faces uncertainty, investors typically increase their allocation to defensive assets, leading to capital outflows from high-growth sectors.

A prime example is today’s rise in gold, which was mainly driven by China’s sudden sanctions on Nvidia, causing concerns about the future of tech stocks. This led to a short-term risk-off sentiment among investors, pushing gold prices up.

Of course, this rotating rally happens not only within industry sectors but also within individual stocks, showing phase-based movements. Let’s take Rolls-Royce as an example which we’ve recently traded, to analyze its price trend. Since the beginning of this year, Rolls-Royce has gone through three price surges, driven by technological breakthroughs, performance growth and increased orders. As shown in the chart, we can see that after each surge, the stock undergoes a period of consolidation. To maximize profits, we need to capture the points where the price starts rising and where it peaks at each stage to maximize the price difference in between.

For instance, our most recent trade on Rolls-Royce was on Nov 26, when we recommended buying the stock. Then, on Dec 4, we gave a take-profit instruction which resulted in a precise operation. This once again proves our grasp of market patterns and our accurate execution of investment strategies.

When it comes to the laws of price fluctuations, you might think fundamental analysis is quite complicated. However, when combined with technical charts it becomes very simple. In actual trading, we notice that no asset goes up without ever coming down. Price fluctuations are the norm in market operations. By analyzing charts, we typically see three patterns of price movement: a downtrend, a sideways trend, and an uptrend. To catch the pattern of price fluctuations, we need to focus on the turning points. For example, how a downtrend can shift into a sideways trend and how a sideways trend can evolve into an uptrend. These turning points are the key signals for our buy and sell decisions. By mastering the turning points in price trends, we can maximize profits from price fluctuations.

As shown in the chart above, when the red candlestick engulfs the green candlestick and breaks below the 21 moving average (as seen in Chart 1), the original sideways trend turns into a downtrend. Conversely, in Chart 2, when the green candlestick engulfs the red candlestick and breaks above the 21 moving average, the sideways trend turns into an uptrend.

This means that in practical trading, we can use the relationship between the 21 moving average and candlesticks to identify price trend changes. When the price drops below the 21 moving average and a "red engulfs green" pattern occurs, it may signal the start of a downtrend. On the other hand, when the price breaks above the 21 moving average and a "green engulfs red" pattern appears, it could signal the start of an uptrend.

Of course, before mastering these techniques, it's still better to follow the trading advice I provide, which will help you achieve more stable profits.

That wraps up tonight’s session. To encourage everyone to actively learn quantitative trading methods and participate in the internal test of AI 5.0 version next month, Diamond Ridge Financial Academy is launching an event where you can exchange learning points for mystery prizes! For more details, please contact the assistant.

If you have any questions about stocks, crypto, forex, etc., feel free to ask me. In the next lesson, we will delve deeper into the accurate buy signals generated by price turning points. Stay tuned!

After tonight’s session, please think about:

1. What caused the adjustment in tech stocks today?

2. What are the different patterns of price fluctuations? How can we predict price movements?