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"It's good to be a bull during a bull market, but nothing compares to being a bear during a bear market" — Warren BuffettGreetings, honorable WSB citizens. I've been playing with SPY and indexes recently, and it led me to formulate an interesting outlook on the current state of the market. I am really curious about what noble WSB gentlemen have to say on all these findings, so feel welcomed to engage in the discussion upon reading the post.
Compulsory, this is not a financial advice, and I am not an advisor - more than that, I am almost confident that I don't even know what I'm doing.
P.S. Commenting "Stonks only go up" as a counter-thesis is perma 🌈🐃
I. The Abstract
The main purpose of this work is to provide a technical counter-thesis to the current market craze, and to spark a constructive discussion. As it was mentioned in the post title, the tools that were used for creating this TA on SPY include: market cycles analysis, for setting a suitable framework; Elliot waves theory as a method of ordering major market movements; Fibonacci retracement for identifying the key, magnetic support and resistance levels; and a sweet 150 moving average to predict the potential bottom of the bear market. These tools will also be given a deeper explanation in the beginning of the discussion, for a bigger circle of WSB participants to wrap their brains around the technical factors at play. If you consider yourself to be a trader with sufficient technical knowledge and skills, feel free to skip the part II. The third part will be focused on the technical data accumulation, based on the historical examples from different time periods, and for different markets types. Part IV is the juiciest, as it incorporates the thesis formation through the application of all the data accumulated in the process of the analysis. V is a bonus part. Without further ado, let's get started.
II. The Technical Core
Cycles appear in many aspects of life; ranging from the very short-term, e.g. the life cycle of a June bug, which lives only a few days (like an average WSB participant's portfolio), to the life cycles of planets and galaxies, which take billions of years.
No matter what market the reference is being made to, the phases are usually not too difficult to identify, and these are cyclical: rise, peak, dip, and then bottom out (and not rise, rise, rise, and rise as many financial experts here strongly believe). As the consequence of the cyclical nature, when one market cycle is finished, the next one begins.
To see how this works on the financial markets, check the SPY cyclicality on the chart provided above (and for a deeper explanation of each phase, just duckduckgo 'market cycles' and click the first link - this should do well).
Good old Elliot! The smart accountant guy, cherished by many technical traders, created his analytical tools as far back as in the 1930s. He discovered and developed the principle that a market moves according to collective investor or 'crowd' psychology, swinging between optimism and pessimism in natural sequences (which can be analyzed with the application of structural wave patterns). Such sentiment swings result in patterns evidenced in the price movements of markets at every degree of trend or time scale (akin fractals).
The wave theory is a complex subject in itself, with many advancements and different wave structures. For the purposes of this analysis only the core principles of impulsive and corrective waves patterns will be used, in order to not over-complicate the process. The fundamental idea behind the Elliot principle is fairly simple, follow Wiki explanation, applying it to the example chart above (Silver):
In Elliott's model, market prices alternate between an impulsive, or motive phase, and a corrective phase on all time scales of trend. Impulses are always subdivided into a set of 5 lower-degree waves, alternating again between motive and corrective character, so that waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller retraces of waves 1 and 3. Corrective waves subdivide into 3 smaller-degree waves starting with a five-wave counter-trend impulse, a retrace, and another impulse. Motive waves always move with the trend, while corrective waves move against it.Furthermore, each wave has its own additional rules and guidelines, which will be mentioned later in the analysis. What should also be noted at this point, is that Mr. Elliot was careful to specify that these patterns do not provide any kind of certainty about future price movement, but rather, serve in helping to order the probabilities for future market action.
Leonardo Bonacci is another important name for any technical trader. It is no wonder, because Fibonacci retracement, as a method of technical analysis, is considered to be one of the most popular techniques for determining support and resistance levels. The Fibonacci retracement tool plots percentage retracement lines based upon the mathematical relationship within the Fibonacci sequence. Fibonacci retracement is based on a core idea that markets will retrace a predictable portion of a move, after which they will continue to move in the original direction. Again, follow Wiki explanation, checking out the NASDAQ chart above:
Fibonacci retracement is created by taking two extreme points on a chart and dividing the vertical distance by the key Fibonacci ratios. 0.0% is considered to be the start of the retracement, while 100.0% is a complete reversal to the original part of the move. Once these levels are identified, horizontal lines are drawn and used to identify possible support and resistance levels. The significance of such levels, however, could not be confirmed by examining the data. Arthur Merrill in Filtered Waves determined there is no reliably standard retracement: not 50%, 23.6%, 38.2%, 61.8%, nor any other.And that is the case! From my own experience, there is no ultimate, universal, favorable to the market Fibo correction level, applicable to all the charts and time-frames. However, as it will be observed and discussed later, many of the cycles' examples addressed will point at 61.8% and 78.6% levels, that is worth keeping in mind.
The simple moving average (SMA) is a straightforward technical indicator that is obtained by summing the recent data points in a given set and dividing the total by the number of time periods. In trading, the moving averages are used to identify the direction of a trend, as well as potential support and resistance levels (and that's how it will actually be utilized in the thesis). It can be computed for different types of prices, i.e., low, high, close or open - and personally, I usually work with the close price.
Moving averages are a matter of personal taste and preference. For example, for the short term trades and analysis I use 21 moving average, and it works like a charm. The MA that is of an interest for this technical thesis - is the 150 close simple MA. As for the long term trends, it seems to work as a strong correction magnet for the bears' run, as well as an ultimate support for the long term uptrend, as you should see yourselves in the examples that follow.
III. The Historical Examples
Allrighty, now lets play with some of the major market cycles examples, applying the TA techniques described above in order to identify potential parallels, similarities/differences and to accumulate some data before jumping to the current SPY cycle. All of the charts in III are monthly charts.
Starting with the cycles, the pattern is fairly obvious: accumulation (always highlighted orange) in 1994; followed by the upward trend (that is the mark-up stage) 1995-1999; what should really draw your attention here, is this fat and long distribution phase, in turquoise, lasting for about two years (this is exceptionally long, as will be seen with other comparisons); the cycle is closed with the year and a half long bear market, that is the mark down phase.
Then, take a closer look at this beautiful motive phrase wave that resembles a perfect TA book example. For the purple impulsive 1-2-3-4-5 wave there are, always, three cornerstone parameters, that have to be confirmed in order for the wave analysis to work out properly:
Overall, a good example of a balanced market cycle with the exceptional distribution phase + interesting Fibo 61.8% and 150 MA tandem support play for the bear market bottom.
Now, starting from the next chart, I will only concentrate on the crucial points. Which means, that you should do your wrinkle-less brain a favor and go through the following checklist off your own bat: identify and analyze the cycles; come back to the DJ 1-2-3-4-5 wave criteria if necessary and practice applying it to the other charts; check the Fibonacci retracement, how it fits and how the waves play with it - many interesting discoveries to be made in that relation. And finally, pay a lot of attention to bear markets: how these start, the steepness, A-B-Cs development, and how Fibo and/or MA save the day. It is also a good idea to apply your own technical outlook spidey senses and compare the charts provided. Feel free to share the findings!
Fucking Ricardo Milos appears out of fucking nowhere and hands you:
a memo of Elliot waves characteristics.
Going further, lets take a look at DAX 2003-2009 cycle. Remember the checklist, run through that quickly yourself: cycles stages, waves, Fibo and MA.
When analyzing the growth stage manifested by 1-2-3-4-5, take a note of the first wave, that kicks 78.6% Fibo, and is temporarily held by it - this happens often, and is easily identifiable on many of the exemplary charts. Pay closer attention to the play and the structure of wave 1 here, as it really is a good example of how it should look. Checking 3 and 5 then - these are big, fat and extensive, and the muscular bulls are to be given credit for that.
What I also feel like pointing at, is the demolishing A-B-C correction, orchestrated by such as muscular bears. The impulse itself is extremely steep, and the full structure resembles a cutthroat dagger - literally, figuratively, visually and even in fucking vibes. Wave A almost touches 38.2% support, B wave bounces from it with a Jedi flick, and is reversed by 23.6% (take a note of A💛38.2%, B🧡23.6%) into a dagger blade C wave. The bears are so powerful at this impulsive C wave correction stage, so they are able to crush through 23.6%, 38.2%, 50%, 61.8% and 150MA altogether, only to be stopped by the support of a last resort (not without a fight), that is 78.6%. Next, the eight month consolidation (re-accumulation) was happening under 150MA and in between 61.8% and 78.6%, just to powerfully revert the price action back to the bullish trend, and the next bull run started. It can be said that the 150MA, 61.8% and 78.6% played as a delicious bait for bears, for which the three were almost torn to shreds, but hedl.
One more thing here. Comparing the current example with the A-B-C wave from the DJI example above, the following point has to be mentioned. If you may recall, A and C in DJ were almost identical. With DAX, C is how I like it. Remember, C is typically at least as large as wave A and very often extends to 1.618 times wave A or beyond - which is the current case.
Important Waves TL;DR: 1💙 78.6% Fibo, while A💛38.2%, and B🧡23.6%. C🗡23.6%/38.2%/50%/61.8%/150 MA while 💙78.6% (check the other charts for these points).
The next chart to look at is a famous gold rally. Another important parameter of 1-2-3-4-5 is worth mentioning at this point: 2 and 4 usually have the following interdependence - if the second, corrective wave is flat, the fourth wave tends to have a sharper structure and vice versa. This principle is illustrated and supported by the chart above. Furthermore, take a look at 3 and 5, which are massive again. This indicates that the bulls are really powerful in this cycle.
Talking about the A-B-C correction, it can observed that again A💛38.2% Fibo. Moreover, this time the retrace level magnetizes the price action firmly, so that the subsequent B wave and a substantial part of C wrap around 38.2% level. The three year correction phase morphs into the accumulation, which is supported by the 50% retracement. Interestingly enough, the lows occurring during this consolidation follow the slope of 150 MA, signalling its supporting power.
Overall, we see a powerful bullish trend, followed by a relatively lengthy distribution phase, followed by a mild correction to 50% retracement, which proves bulls to be fundamentally strong in this market. Even though 150 MA seems to act as an invitation to bears initially, at the end of the day it is on the bulls side, protecting 61.8% and 78.6% from the bothersome honey lovers, and making them scared just by its look alone. And yeah, almost forgot, 1💙 78.6% Fibo.
Ooh, the fifth wave looks just crazy on this chart, and that is in the nature of volatile markets such as WTI. There are several points of interest for the reader in this example. The noticeable one, is that there is no obvious distribution phase on the chart above. That is, again, the nature of volatility - sometimes some of the markets are moving too fast, not leaving investors a chance to unhurriedly close their positions (or giving a very short window). There is a chance for the thesis to play out similarly, so let’s take a note here.
A-B-C here is pure art, so hardcore that there are no green candles (on 1M chart). It is difficult to imagine how fun it was to be a bear throughout this correction. As a result of such an intensive move, it is difficult to identify and separate the waves here, but not impossible. Analysing A-B-C: A💛38.2 again, whereas B is almost nonexistent, which probably should also be attributed to the volatility. C, in its turn, is a masterpiece of a bear creation: it pierces 38.2%, 50%, 61.8%, 78.6% and the 150 MA altogether (the latter two again act as a sweet spot for the bears to touch down throughout the whole correction phase) with a sequence of three lethal red candles. Brutal.
Yet again, 78.6% Fibo and 150 MA save the bulls’ asses and reverse the bearish trend. And how about this observation: if A💛38.2, then it is fair to say C💙61.8%/78.6%💜150 MA - again, check the other charts for that assertion.
Hang Seng, Konnichi wa! Interesting chart of another volatile market, with several major similarities to the previous example: powerful 3 and 5, microscopic distribution phase, A wave piercing 38.2%, C behaving almost identically as WTI C in relation to 38.2%, 50%, 61.8%, 78.6% and the 150 MA.
Additionally: 1💙78.6%; B🧡23.6% - never forget!
Also, what I noticed to be a common characteristic for the majority of examples here: the tougher 3 and 5 are, the more severe correction follows. Check this point out on the other charts!
This is the last one before SPY thesis explanation, I promise! Also, this historical example has the biggest weight among all of the discussed here, because this is the direct predecessor of the current cycle.
To begin with, 1💙78.6%. You may find it funny, or mocky that I refer to that often, but this one is a crucial point to help with the Fibo application for the thesis later. Next, 1-2-3-4-5 checklist ✅ (refer to DJI for that matter). Solid wave 3 and wave 5, which also tend to correlate with the severity of the bear phase - and again the correlation is confirmed in this cycle.
The distribution phase lasts for about 7 months, allowing plenty of time for investors to fix their profits, before the powerful A-B-C correction starts (looks a bit like DAX dagger). You may notice that A💛38.2%, and B🧡23.6% again, and these prevailing patterns will also be among the cornerstones for building the thesis. C wave, in its turn, while breaking through 61.8% Fibo retracement, gently touches 150 MA to complete the mark-down phase. 150 MA subsequently acts as a sound support for the next accumulation phase, after which the market reverts back to the bullish consensus.
The price action elaborated in the second part of the previous paragraph yet again serves as a strong support for the proposition that a) during a bear market 150 MA coupled with 61.8% or 78.6% plays as a reference point for the bears to aim to; and b) 150 MA + 61.8%/78.6% never (at least in the examples provided) let the bulls down in the long term.
IV. Dr. Bearlove or: How I Learned to Stop Worrying and Love the Bear Market
Hooray! If you've read the whole thing and came this far, you are an exceptional WSB citizen of focus, commitment and sheer fucking will. If you just jumped here for the most juicy part, I should strongly encourage you to at least check several examples from III, as these are helpful in understanding what tf is going on here (I hope so).
Diving deeper now, I decided to separate the thesis into four parts: applying the core analysis and the data accumulated to 1-2-3-4-5, as the first (1) step; (2) explaining the A-B-C wave parameters of the thesis based on the historical data accumulated; and then (3) providing additional context to back up and explain the starting point of the mark-up phase (the orange triangle's nose, on the chart below) - please take it take for granted for now; while the last piece of puzzle incorporates the elaboration of the distribution's and A-B-C's duration (4).
The Thesis Restated
Fibonacci retracement coupled with the Elliot wave theory, when applied properly, may well be used as a beacon shining the light on the timeliness and the necessity of a correction. In my opinion, the thesis illustrates that metaphor incredibly well, just by showing how precisely the technical framework fucking fits this SPY lab 🐁. Take a look how adherent the price action is in its interaction with the Fibo levels (e.g. the lengthy consolidations below 78.6% and in between 50% and 61.8%, or 23.6% clearly acting as a resistance during 4). But most importantly, check out this gorgeous Elliot waves 1-2-3-4-5 pattern, which is either completed already (my bet), or will be done in the not so distant future. Let me elaborate on all of that.
Staring from Fibo and wave one, this time the price action surrounding apex of wave 1, wave 2 and the beginning of 3 💙78.6% for about 2 years! If this is not a true love, then I don’t know what is. Wave 1, in this case, is a very solid incarnation of the traditional 1 structure: soft, relaxed and unhurried. Additionally to that, 1 looks similar to four other examples in III, particularly DAX, Gold, WTI and Hang Seng.
Next, let’s recall an important principle regarding 1-2-3-4-5, discussed in III:3 (Gold), namely: the structures for the second and the fourth wave usually alternate in the following interdependence - if the second wave is a flat correction, wave four tends to have a sharper structure and vice versa. Take a look at the thesis chart again: like in a fucking Raffaello slogan - more than a thousand words.
The final step to do is to go through the 1-2-3-4-5 golden checklist, introduced in III:1 (DJI):
Now, let's discuss the most ungrateful part. Ungrateful, because the chances are, well, that markets will shit on your TA and forecasts, even if a lot of effort was put into it. So what, I am not a fucking pussy to stop trying and learning.
Anyway, this is how I got the A-B-C projection parameters. Again, based purely on the historical data accumulated. First things first, A💛38.2%, and at this point it is an understatement. Please, refer to III and check the charts. Seriously, do not be lazy, it is worth it. Because you will notice that A wave gravitates to 38.2% on all of the examples analyzed, to a great extent. Especially, check the grandfather (III:6), which weights at least twice as much for the thesis, compared to others (perks of being relatives). B wave, in its turn, retraces to 23.6% or above in 4 cases out of 6: DJI, DAX, Hang Seng and the grandfather - which is sufficient to assume that B🧡23.6%, imho.
Oh yeah, wave C. It was stopped by 50% Fibo once (Gold), twice by 61.8% (grandfather and DJI) and three times by 78.6% in DAX, WTI and Hang Seng. Also, it has been evident through all of the examples, that C has a fetish for 150 MA, and it is mutual. These factors, after being summed up, weighted, and distilled - point at the zone between 61.8% and 78.6% Fibo. And guess what? The grandfather's C landed just there. Noice.
As it has been mentioned, it was difficult for me to identify where to start the wave count for the thesis. Before I zoomed out, and saw this ⬆️. F.U.C.K is how I named it.
Fuk, I just wanna go sleep, so take this short explanation. Based on the previous cycles and mark up to mark down historical proportions: 63/22≈2.86; 48/15=3.2; (3.2+2.86)/2=3.03.
Two historical SP 500 distribution phases last 6 and 7 months. I like number 7 more.
94/3.03=31,333333333. Illuminati confirmed.
V. The Plays
Listed according to my personal risk tolerance preferences, safer plays first (but I bet that you'll start from the bottom anyway).
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