The Bear Market Psychology-Price Volume Analysis

Bravetotrade Mod Updated   

As this post is merely for educational purpose, let the stock remain anonymous for the time being. The analysis would not only be applicable to long term charts but also to smaller time frames.

I have found two important phases of Panic Sell-off in a bear market. One in the beginning and one in the end. The former phase is good for sellers and the latter is good for buyers. As can be seen on the colored bars on left of chart, there is maximum erosion of capital (32%) in first phase (red bar). Then the downthrust reduces in successive breakdowns (10% and 9%) till the last phase (just assuming that its the last full post to understand this point) where it increased to 13%.

The correction started with the break of Level 1, an important swing point low of the last leg of the bull move. At this level, big fund houses, swing traders and smart medium term traders are the first one to move out. On the same day a major swing low of the larger bull run was broken at 918. Majority of the long term investors would have sold their positions this point. You can notice huge volumes on this day. The sell-off In Candle ‘b’ might have been from investors who wait for confirmations. Candle 'a' and 'b' represent the ‘Panic Sell-off’ by traders and investors.

Stock rallied from 'b' but the bear run continued. The stock consolidated at Level 2 for some time and broke that level too in candle 'c'. Candles 'c to e' made successive lows but look at the volume, there is dearth of supply.

Stock made a nice rally form 'e'. Some optimism is seen in this rally as stock started to rally above Level 2 support. At this point a general conception would have been that the downmove was merely a correction and stock would rally. The areas marked with rectangle are where new traders and investors got trapped. Their stops might have been under Level 3.

And then came the moment..Boom!! A gap down opening at 'f'. Level 3 lows are broken. All those who were trapped just sold off, and everybody agrees that the stock is in a bear market. Volume on that day was the heaviest so far in this bear run. Next day there was no continuation of downtrend. Heavy support came back at 'g' resulting passive rally. Buyers have less confidence in the stock. But still some buyers got trapped as stock consolidated for a considerable time above Level 4. The volume was bleak during this consolidation—which according to books is a good sign. But no one knew that its not over yet.

Whooop!! Level 4 is also broken in candle 'h' and made successive lows in i, j and k. May be those who bought above level 4 sold in this move. But just look at the volume and compare to volume at a, b, c, d, e and f. Notice that there is very less supply now means buyers are not interested in selling at this price. They want to hold and sell high.

At 'l' stock made a lower low but rebounded with increase in volume. Huge overhead supply came at 'm' but this supply is absorbed by the buyers resulting into a v-shaped rally. The volume at this stage are still average because buyers are waiting for confirmations and strength. It is the long term investors who are buying again at this stage.

What next?
Nobody knows yet if bear market is over. But minimum supply in last fall below Level4 and the absorption in the recent rally is the first sign of relief. However, there might be pull backs, shallow rallies, retest of lows or consolidation before the stock comes under ‘scanners’.

Although I could not cover the whole chart bar by bar in my analysis (covered most important candles only) yet this brief summary of a bear market psychology would help investors and traders in future. Please hit 'like', follow and share if you found it interesting.

#This is DivisLbs daily chart.
I didn't know that they will past the name under the title. So its no longer an anonymous stock.

Positive divergence and DIVISL..moving already. Hoping some day it crosses 80 and flies away.
80 on Stochastic I mean :)

JJ Singh
Full TIme Trader/Investor
Moderator, TradingView

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