Wednesday, March 2, 2016

From Denial to Gradual Acceptance

The markets are repetitive.  They are ruled by human emotions, and as much algos rule the short term trading intraday, they are not much of a factor in longer term time frames, that stretch out for weeks and month.  Those time frames are ruled by fund managers and institutions who rarely turn on a dime from going from bearish to bullish.  It is a process.

The process usually starts with a V bottom which gets the initial fast money traders excited about a bottom being made, but uncertain if it is just a 2 day wonder or the real deal.  Even after a couple of weeks, with choppy trading caused by the lack of full commitment to the bull case, you are still in the denial phase, saying that this is just a bear market rally.  We were still at that phase until yesterday, when things changed with a emphatic break above 1950 and to levels we haven't seen since early January.

Now we are in the longest part of the cycle, the acceptance phase.  It is gradual, and takes time for the newly converted to amass their equity positions and get ready for continued rise higher.  It is at this point that the volatility dies down a bit and lulls the traders into a sense of complacency and comfort.

In a bearish market, this acceptance phase is followed by a vicious downturn that can go on for several weeks.  In a bullish market, the complacency is often shaken off with a 1 or 2 week pullback that just forms another V bottom and continues higher.  This is what happened from 2009 to mid 2015.  Now we are in what I believe to be a bearish market.  So after this acceptance phase is over, you should get hard selling.  That is what I will set up for in my next trade.

In the meantime, just playing small ball and waiting for the right pitch to hit.

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