teaching technically, chapter 6, March 14th
Chapter 1 | Chapter 2 | Chapter 3 | Chapter 4 | Chapter 5 In the sixth chapter of notes, I define the fourth stage of market activity, decline, by its characteristics. In the previous chapter, we learned that distribution does not assure the stock will reverse to a decline phase, but the indecisive action offers no exploitable edge to traders. Now, we continue to look at the stages individually, following up with decline.
I couldn't agree more with the following statement Brian Shannon, author of Technical Analysis Using Multiple Timeframes.
"...a bear market is most participants least favorite time for many market investors who try to catch a falling knife, rather than wait for it to drop then pick it up."
The opportunity exists on all timeframes, this is the first assumption we hold upon reading the contents of Shannon's books. Why? The fractal properties of markets implies that periods may exhibit parts of whole structures within given timeframes.
I use this information to internalize the truth contained these rap lyrics;
opportunity be knockin' gotta let 'em in
Before we appreciate the opportunity therein, we must...
Simply put, the following definition of a bear market is as follows:
An environment where the path of least resistance is lower for the market being studied.
A snippet from Shannon specifies even more:
The sellers are clearly in control and are able to create a condition where lower highs and lower lows prevail. The supply of stock offered to the market is greater than the demand can absorb at current prices, which forces a move lower in search of liquidity.
I draw attention to bullets to summarize even simpler:
- sellers are clearly in control; they're able to create a new condition
- the condition is defined by two things: lower highs and lower lows
- the stock offered is greater than the stock demanded
As it held for the momentum of an uprend, the following idea remains true in decline stages.
The sum of the declines will always be greater than the sum of the rallies in a downtrend.
The basis of trend trading (once a trend has been established, the more likely it is to continue than to reverse) within the context of the decline stage makes a strong case for the next subject within this chapter.
With the definitions clarified, let's explore some other topics I do not readily participate in. They concern the most common plan of action in downtrend:
I can only observe I was once the "sheep" trader, following herds of thought leaders, news outlets, social media and random comments about assets. They all failed me as I suffered from the second type of fear, for long participants in a bear market.
The two brands of fear as follows:
- Fear that the stock's descent will continue to wipe out their equity is actually a good fear to have. Ideally, this spurs one to exit the position more timely than not.
- Fear of feeling stupid for selling "the loser" at a point just before the stock turns higher is a bad fear to have.
Short-term pauses in a primary downtrend have been my downfall before. The bear market holds promise in my eyes, as I observe and study only, without any exposure. Also, because I watch with a close eye, I can observe the various stages as they are fractal, all within a bearish market.
A thought experiment
Shannon makes a case that all of the features within a market stage are interconnected: frustrated long buyers selling into losses, giddy short sellers asking aggressively lower prices, false hopes within rallies, all the while moving averages interwine but generally swing downward.
It proves to be true, though we must remember, news follows the trend.
Only price pays. Speculatory articles truly miss that emotions drive participants and the visualization of the emotions of participants are seen within price charts.
Consider this discussion with a friend the other evening. We considered market capitalization as a benchmark for assets- though they may not hold similar premises at all.
DOGE versus APPL, for example.
I round to the nearest cent, for ease. At seven cents, ($0.07) the market cap of the crypto is about 10 billion dollars. We find this multiplying price by the number of shares (tokens, coins, etc.) outstanding.
For Apple, the tech company, we can do similarly. A current price of $152.80 multiplied by its shares outstanding equates to 2.42 trillion dollars (2,420,000,000,000). A lot of zeros.
At that rate, based on price alone, Apple is 242 times as valuable as Dogecoin. Most who are familiar might agree, or even suggest DOGE is worth even less. However, during a bull run, DOGE saw prices upwards of 70 cents.
Ten times the price, multiplies the market cap by ten, for a total of 100 billion dollars. At that level, compared to Apple, it's only down by 24.2 times.
I stop to ask a question about value now. As value is relative, not absolute, would you agree that Apple is more valuable than Dogecoin? How much so?
My friend and I speculated about the feasibility of different prices. As this article shares, for the thought experiment, DOGE at $10 per token would have a market capitalization of 1.33 trillion dollars, all things held constant.
At that level, would Dogecoin be worth about half of what Apple is today?
Bear markets host doomsayers, chiming they knew the bull run would end. They also feature 'dyed-in-the-wool' bulls who croon the rising markets will return. In between, we have short-term speculators as well as longer-term investors. I find it important to learn the way of momentum, as it almost holds more easily understood concepts than "value propositions" of these assets.
Does an asset founded on a whim as a joke merit any attention at all? Is it more than a tech company selling goods at luxury prices?
Of these questions, I am not the final judge nor jury. I can only ask myself the most pertinent question as a trader:
What is my edge?
Three cycles into cryptocurrency and blockchain, experience and learning are my tools to digging up the gems of knowledge I convert to profit for my coffers.
I stack my bread and cheese, knowing how to cook in the markets, baked over time.
- In the sixth chapter, I cover the stage that crypto recently departed from in my opinion, the bearish market stage of decline. We would be abouts in accumulation, which is my current strategy, moving towards markup.
- The decline stage is marked by sellers having control, lower highs and lower lows.
- There exists more supply to sell than demand to buy at this stage.
- As with corrections during uptrends, rallies during downtrends aren't to be trusted.
- Value isn't absolute, it is relative. What I am willing to read about and learn, others might pay for. What feels valuable to buy and sell, might be less than for another.