Thursday, 8 March 2018

Market Stages and Emotional Cycle

Always know where you are in the market cycle. 

There  are  three  price trends that are simultaneously active in any market: the short-term trend, which lasts from days to weeks; the intermediate-term trend, which lasts from weeks to months; and the long-term trend, which lasts from months to years.
Within each market there are three basic types of participant: traders, speculators. and investors. Traders  focus  their  activity  on  the  intraday  and/or  short-term  trend.  They  buy  and  sell  stocks,  bonds,  commodities,  or whatever within a time frame varying from minutes to weeks. Speculators focus on the intermediate trend, taking market positions and holding them for a period lasting from weeks to months. Investors, dealing mainly in the long term trend, hold their positions from months to years.

Three trend definitions:
A. Primary trend - Use about two years data and draw a line, touching the troughs (low turning points).
B. Intermediate trends - Using channels to highlight them and within
C. Short term trends like the red lines.

From 33 years J203 index data, the following conclusions:

Primary bull markets: 
  1. The beginnings of bull markets are virtually indistinguishable from the last secondary reaction in the bear market until the passage of some time.
  2. Secondary  reactions  in  bull  markets  are  usually  marked  by  sharp  rates  of  price  decline  relative  to  the  preceding  and ensuing price increases. In addition, the beginning of the reaction is usually marked by high volume, with the lows made on low volume.
  3. The confirmation date of a bull market is the date when prices in both the averages break above the high point of the last bear market correction and continue to move upward.
  4. The primary bull trend is more likely to start in January or April, but never in May, August or December.

And on primary bear markets:
  1. The beginnings of bear markets usually follow a "test" of the previous bull market high.  On low volume followed by sharp declines on high volume. A "test" is when price levels closely approach but never reach the previous high point jointly. The low volume during this "test" is a key indication that confidence is at a low ebb and can easily turn into an "abandonment of hopes upon which stocks were purchased at inflated prices".
  2. After  an  extended  bear  swing,  secondary  reactions  are  usually  marked  by  sudden  and  rapid  advances  followed  by decreasing activity and the formation of a "line," which ultimately leads to slower declines to new lows.
  3. The confirmation date of a bear market is the date when prices on both the averages break below the low point of the last bull market correction and continue to move downward. It is not atypical for one average to lag the other in time.
  4. Intermediate bear market rallies are usually inverted "V" patterns where the low is made on high volume and the high is made on low volume.
  5. The primary bear trend is more likely to start in May, but never in February, November or December.
 The below data been used to conclude: 

Zooming in on the Intermediate trends, the following:
Focus on the risk involved. Risk involves chance and chance involves odds. Odds take two forms: either those set subjectively by a professional odds maker, or those that are measurable according to probabilities based on a statistical distribution of limited possibilities.
It's notable that trading in shares, isn't a quick-rich-scheme.  Though big money can be made on the Primary and Intermediate trends, when the Up trends outperformed the Down trends.

Pick-N-Pay is a text book example trade

All stock has cycle stage: Love It, Hate It and Somewhere in Between

Similar to the economic cycle, which consists of: expansion, peak, decline and recovery, stock can be categorised into four different stages. These stages are:
1. Accumulation – Accumulation follows a period of decline; it is the process of buyers fighting for control of the trend. It is a neutral period marked by contraction of price ranges that offer no tradable edge for a trend trader.
2. Markup – Once buyers have gained control of the stock and pattern of higher highs and lower lows has been established, the path of least resistance is higher.  It is a bull market and traders should be trading the long side aggressively as price expands higher in search of supply.
3. Distribution – After the market has exhausted the majority of buying demand, sellers become more aggressive, which turns the market neutral.  This period of price contraction precedes a decline.
4. Decline – When the lows of stage 3 are breached, price expands to the downside in search of demand to satisfy the aggressive supply being offered.  The pattern of lower highs and lower lows is the hallmark of bear market, and the only appropriate strategy for a trend trader is to sell short.

Trend traders always focus on being long the stage 2 stocks and short the stage 4 stocks, avoiding the neutral stage 1 and 3 stocks.  An uptrend is defined by a series of higher highs and higher lows while a downward trend is defined by a series of lower highs and lower lows. Successful trading is all about finding an edge and exploiting it for your gain. If we can’t find such advantage, there is no reason to be involved.

In more detail: