SPY- Philisophical Discussion
There are some things that I need to get off my chest.
In the three different types of market cycles, price action, breakouts, and indicators all act very differently from each other. One can know technical analysis, but if you cannot curtail your mindset, and indicators depending on market cycles then you will usually find yourself on the losing side. One can find wonderful patterns and typically consistent indicators but applying them wrongly depending on the market cycle will fill your portfolio with traps (in this case potentially bull traps) The three cycles are: bull, consolidation, and bear. In a bull cycle certain MA's reactions, Stochastic levels or RSI readings will signify vastly different things. For example, a certain moving averaging in a bull cycle will often support price, that same moving average in a bear cycle would suppress price movements. RSI readings are in a completely different range when in a bull versus bear cycle. RSI in a bull cycle is confined to a certain range (upper half of the RSI). During a consolidation phase this range changes as well (very wide range up and down); and of course, in a bear market cycle, this range is changed once again (to the lower half of the RSI). If you look back to previous market cycles you can easily see how these ranges change, ref: the chart below. I have taken the RSI ranges from 2008 and 2000 for finding what ranges I should be looking at on the RSI to determine more accurate swing limits on the RSI. Remember if we are looking at a Daily Chart here in the past then I would want to be using the same timeframe in our current charting to reflect the same levels (as changing the timeframe will change the levels.)
When did all of these rules change all of a sudden at what point did we become officially in a bear market? Well, there are many different definitions for a bear market, some people look at a 20% drop in price, others look at a 16% drop in price. Some look at 200 MAs on varying time scales monthly, weekly, or daily. Some look at death crosses, some look at yield curves in bonds to forecast such events. Others though, like myself use the 21 Monthly EMA. This to me has shown the most consistent historical results, as well as quick delivery, to show us what cycle we are in without having to wait for a 20% drop to happen first to tell us that things are looking bad. Trading this way allowed me to catch the 20% drop instead of miss it and wait for 20% and then get bearish while we have a Bear market rally to the upside. This 21 monthly EMA come in at 263 when we were making our breakout shorts as one of my prior analysis made very clear. Now, this Moving Average comes in at 260. * If price were to get above 263 and hold above it and continue higher on a weekly or monthly chart, then I would be ready to throw in the Bear towel, until then I will be shorting bounces, small timeframe bearish divergences, daily stochastics, RSI ranges, Daily MA tests or small timeframe high volume topping candles/price action, or decreasing volume on the daily chart as bounces are produced.
Daily Stochastic- I do like using the stochastic on the Daily level and then hone in from there a more precise possibly short entry when the 1-4hr stochastics are in alignment with overbought daily readings.
If all indicators behave differently in different market cycles then how can the Stochastic act any different if it is an oscillating indicator? Well, It itself will not act any differently as an indicator but the result of the indications will. We can look back to all of the times the Stochastic has called tops in the last year long Consolidation market cycle and see that the stochastics did call tops but with very little reward in shorting them. But if we were to Track these Daily overbought readings in a bear market cycle it will look vastly different and very profitable.
Daily Stoch 1 year
Daily Stoch Bear Market
2007
2000
In the three different types of market cycles, price action, breakouts, and indicators all act very differently from each other. One can know technical analysis, but if you cannot curtail your mindset, and indicators depending on market cycles then you will usually find yourself on the losing side. One can find wonderful patterns and typically consistent indicators but applying them wrongly depending on the market cycle will fill your portfolio with traps (in this case potentially bull traps) The three cycles are: bull, consolidation, and bear. In a bull cycle certain MA's reactions, Stochastic levels or RSI readings will signify vastly different things. For example, a certain moving averaging in a bull cycle will often support price, that same moving average in a bear cycle would suppress price movements. RSI readings are in a completely different range when in a bull versus bear cycle. RSI in a bull cycle is confined to a certain range (upper half of the RSI). During a consolidation phase this range changes as well (very wide range up and down); and of course, in a bear market cycle, this range is changed once again (to the lower half of the RSI). If you look back to previous market cycles you can easily see how these ranges change, ref: the chart below. I have taken the RSI ranges from 2008 and 2000 for finding what ranges I should be looking at on the RSI to determine more accurate swing limits on the RSI. Remember if we are looking at a Daily Chart here in the past then I would want to be using the same timeframe in our current charting to reflect the same levels (as changing the timeframe will change the levels.)
When did all of these rules change all of a sudden at what point did we become officially in a bear market? Well, there are many different definitions for a bear market, some people look at a 20% drop in price, others look at a 16% drop in price. Some look at 200 MAs on varying time scales monthly, weekly, or daily. Some look at death crosses, some look at yield curves in bonds to forecast such events. Others though, like myself use the 21 Monthly EMA. This to me has shown the most consistent historical results, as well as quick delivery, to show us what cycle we are in without having to wait for a 20% drop to happen first to tell us that things are looking bad. Trading this way allowed me to catch the 20% drop instead of miss it and wait for 20% and then get bearish while we have a Bear market rally to the upside. This 21 monthly EMA come in at 263 when we were making our breakout shorts as one of my prior analysis made very clear. Now, this Moving Average comes in at 260. * If price were to get above 263 and hold above it and continue higher on a weekly or monthly chart, then I would be ready to throw in the Bear towel, until then I will be shorting bounces, small timeframe bearish divergences, daily stochastics, RSI ranges, Daily MA tests or small timeframe high volume topping candles/price action, or decreasing volume on the daily chart as bounces are produced.
Daily Stochastic- I do like using the stochastic on the Daily level and then hone in from there a more precise possibly short entry when the 1-4hr stochastics are in alignment with overbought daily readings.
If all indicators behave differently in different market cycles then how can the Stochastic act any different if it is an oscillating indicator? Well, It itself will not act any differently as an indicator but the result of the indications will. We can look back to all of the times the Stochastic has called tops in the last year long Consolidation market cycle and see that the stochastics did call tops but with very little reward in shorting them. But if we were to Track these Daily overbought readings in a bear market cycle it will look vastly different and very profitable.
Daily Stoch 1 year
Daily Stoch Bear Market
2007
2000
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