Unit_of_Technical_Analysis: Chapter 2: Bear Cycle: how to identi
Unit_of_Technical_Analysis: Chapter 2: Bear Cycle: how to identify prior phase, the Bear Cycle, End of Bear Cycle.
How to trade the Bear cycle.
Tools used:
1. Fibonacci
2. Relative Strength Index (RSI) (36)
3. Moving Average Convergence Divergence (MACD) (18,36,9)
4. Moving Average (MA) (36)
Time Frame: Daily
Method:
1. Bearish Divergence & Rising Wedge for identification of downtrend along with Fibonacci
2. Bullish Divergence for Uptrend along with Fibonacci + Trendline Breakout
Cycles within the Cycles:
1. Phase 1: Bearish Divergence
Dates: 15/10/07 – 08/01/08: Pre-Phase of Bear Cycle (marked with red vertical lines)
We continue with our Bull trend, and identify Bearish divergence in Daily Chart. On 15/10/07 RSI(36) is 73.11 while on 08/01/08 RSI(36) is 63.49, over a period of this 75 days, we identify a huge drop in RSI (drop of around 10 points in terms of units), while the price is still creating Higher Highs (HH) & Higher Lows (HL) patterns these difference of Price moving upwards while Indicators moving in downward direction is called as Bearish Divergence. (Marked with Red arrows in chart)
Rising Wedge: The price typically follows a pattern where it is moving upwards but with small and limited highs then the previous ones, the length of the swings are reduced which can be identified from the rising wedge. (Rising Wedge: an inclined line less than 45degree, where the price touches the topline of the wedge and moves down again)
These Indicators/ Oscillators always gives us Signals, while we can start getting confirmation from Fibonacci retracement, where price starts creating Lower High (LH) & Lower Lows (LL) after the 2nd Range formation (check 2nd Fibo with low of 4448.5 on 22/01/08 and ATH of 6357.1 on 8/1/08), we get a 50% retracement. The best part is to terminate your long calls if we don’t move above these 50% retracement.
There are other methods too like trailing your SL to previous Lows, or Fibonacci retracements. Even the 1st Fibo can be used for these purposes but is very difficult to catch at times.
Bearish Divergence in Daily charts are strong and should be taken very seriously, if we are in long calls we should keep on trailing our SL to previous low/ trail SL after the low or wait for completion of Range, trail your SL to low, and trail SL to 0.5 level or 0.236 level of range thereafter. Idea is to keep maximum profits in your pocket and get ourselves prepared for the Bear Trend.
2. Phase 2: Bear Phase
Dates: 8/01/08 – 27/10/08: The Bear Cycle:
During the Bear Cycle, Price, RSI & MACD are moving in same downward direction, i.e. with every downward movement in price, RSI & MACD are also moving down. We can see continues Lower High (LH), Lower Low (LL) patterns in the Bear Market. The confirmation of getting into Long Bear sell signal is important.
Signal: RSI & MACD are moving in downward direction in tandem with Price after the All the Time (ATH)
Confirmation to get into short selling for Bear Trend: The best part is to get into selling streak in short selling is when we don’t move above the 50% retracement in Daily. We apply the same method as seen in Chapter 1, we draw a range from High of 6357.1 (Level 0) on 8/1/08 to Low of 4448.5 (Level 1) on 22/01/08 and wait for a retracement upto or just above the 0.5 level or range, we can get into smaller time frame and look for intraday/15 minutes price action where we get a signal on Fibonacci for an Entry or get an Entry once the market starts moving below 0.5 level (on 6/2/08, it started moving down) with small SL. (We will work on detailing again in coming Chapters)
On 4/2/08, market gave a strong breakaout above 0.5 levels, next day i.e. 5/2/08, it created a support (read as low of the day) at 0.5 level and closed above it, also the candle pattern created was evening Star. On 6/2/08, finally Market moved below 0.5 level with a big red candle and continued its downward Journey. (It always very important to watch out for these 50% retracement levels which act as turning point in the market and where maximum changes of loosing money occurs because we are not sure for the direction)
Many a times, market gives a false breakout around 0.5 levels, takes up the top of previous candles and then starts moving down. Example Check market range from High of 19/10/21 to Low of 29/10/21 followed by 50% level retracement from 8/11/21 to 16/11/21. Here on last 2 days, the market breaks the Top or previous 3-4 days, is not able to sustain and then starts moving downward again. (There are numerous such examples)
(We may have to try once or twice for a good entry but don’t over trade)
Continuation of downtrend
The downtrend is continued by forming new Lower Highs (LH) and Lower lows (LL), here the trendline can be broken to form a new trendline. (Lets have a small glimpse of trendline study)
Trendline: From the market high to next high of 50% retracement level (2/5/08), the line joining these 2 points will be your 1st trendline, please remember, there can be slight change in trendline or formation of new trendline after a period of time, check with RSI & MACD for confirmation of reversals.
The trendline breakout is generally followed by a back-testing (after breakout with good bullish candle/s) and again breaking the 50% high, if the 50% high is not broken, it is a false breakout (It may form a double top too), here we had 3 similar examples of new trendline formation:
a. 27/2/08 high, followed by back testing and upmove to 2/5/08 high
b. 2/5/08 high, again followed by back testing and upmove to 12/08/08 high
c. 12/08/08 high, back testing and upmove, we had a new high, but these high didn’t break above the 50% high on 4/2/08 or 2/5/08, we had a breakout, back-testing (28/8/08) and again the previous high of 12/8/08 was not broken and market started moving down again. (That’s how the fight between Bulls & Bears goes on) subsequently we keep on creating Lower High (LH), Lower Low (LL) pattern and the downtrend continues.
Important thing, is to look for patterns creating an uptrend, followed by Bullish Divergence and most important Price moving and sustaining above 50% level. If price doesn’t sustain the 50% level, we are in reversal.
These is the most important aspect that we saw in Chapter 1, where Bull Cycle follows a pattern of creating a Range from Low (0) to High (1) and Price taking a support at 50% levels (0.5 level of the range) or 0.236 level of the range.
Finally, we see a low on 27/10/08 for a time period of 9.5 months
3. Phase 3: Bullish Divergence/ Accumulation stage
Even if we can make out from the chart later on that, the price was the lowest on 27/10/08 of 2252.75, the real test is studying the market after 27/10/08 and finding out when we can expect a reversal and catch the reversal during the time period. After the market has completed a downtrend, that marks the end of Bear Phase.
The Bull phase is yet to start, before that, there is accumulation phase, which is marked by a range bound price movement and rise in RSI & MACD values. Consider Range of, Level 0, Low of 2252.75 on 27/10/08 and Level 1, High of 3240.55 on 5/11/08, the Idea to find out a range is again the most important part, tap for potential reversal around 0.236/ 0.5 level.
Dates: 27/10/08 – 06/03/09: End of Bear Cycle and Pre-Phase of Bull Cycle (marked with red vertical lines)
We continue with our Bear trend, and identify Bullish divergence in Daily Chart.
On 27/10/08 RSI(36) is 30.0 while on 06/03/09 RSI(36) is 42.88, on 05/03/09, RSI(36) is 41.65, and 09/03/09 RSI(36) is 41.9. (I have considered RSI(36) for 3 consecutive days just for the sake of average) over a period of this 130 days, we identify a huge rise in RSI (rise of average 12 points in terms of units), while the price is still range bound and touched the 0.236 level (2485.85) of the range twice, once on 20/11/08 when RSI (36) was 36.25 and second on 06/03/09 creating Higher Highs (HH) & Higher Lows (HL) patterns these difference of Price being range bound while Indicators moving in upward direction is called as Bullish Divergence. (Marked with blue Arrows)
Subsequently, we see channel breakout, backtesting and price making further HH-HL pattern.
Observations:
The price movement during the Bear phase is systematic and moves in 3 phases as described above,
Identification of downtrend trend can be best seen with Bearish divergence and confirmation with price action in the form of Fibonacci Retracement and vive-versa for Bullish Divergence.
For continuation of trend, Price, MA, RSI & MACD are moving is tandem.
Conclusions:
1. Fibonacci retracement can be best used along with RSI & MACD.
2. We can identify signals when small Fibonacci (in 15/30/hourly charts) gives retracement @ 0.236 levels and Short Sell signal for Weekly/ Monthly calls with 50% Fibonacci levels are described above.
3. Reversal patterns can be best identified with Fibonacci when Higher-High-Higher Low patterns are formed.
Notes:
What is Bearish Divergence, Bullish Divergence & Rising Wedge, Moving Average, Trendline & Breakout, there are various youtube videos available
How to trade the Bear cycle.
Tools used:
1. Fibonacci
2. Relative Strength Index (RSI) (36)
3. Moving Average Convergence Divergence (MACD) (18,36,9)
4. Moving Average (MA) (36)
Time Frame: Daily
Method:
1. Bearish Divergence & Rising Wedge for identification of downtrend along with Fibonacci
2. Bullish Divergence for Uptrend along with Fibonacci + Trendline Breakout
Cycles within the Cycles:
1. Phase 1: Bearish Divergence
Dates: 15/10/07 – 08/01/08: Pre-Phase of Bear Cycle (marked with red vertical lines)
We continue with our Bull trend, and identify Bearish divergence in Daily Chart. On 15/10/07 RSI(36) is 73.11 while on 08/01/08 RSI(36) is 63.49, over a period of this 75 days, we identify a huge drop in RSI (drop of around 10 points in terms of units), while the price is still creating Higher Highs (HH) & Higher Lows (HL) patterns these difference of Price moving upwards while Indicators moving in downward direction is called as Bearish Divergence. (Marked with Red arrows in chart)
Rising Wedge: The price typically follows a pattern where it is moving upwards but with small and limited highs then the previous ones, the length of the swings are reduced which can be identified from the rising wedge. (Rising Wedge: an inclined line less than 45degree, where the price touches the topline of the wedge and moves down again)
These Indicators/ Oscillators always gives us Signals, while we can start getting confirmation from Fibonacci retracement, where price starts creating Lower High (LH) & Lower Lows (LL) after the 2nd Range formation (check 2nd Fibo with low of 4448.5 on 22/01/08 and ATH of 6357.1 on 8/1/08), we get a 50% retracement. The best part is to terminate your long calls if we don’t move above these 50% retracement.
There are other methods too like trailing your SL to previous Lows, or Fibonacci retracements. Even the 1st Fibo can be used for these purposes but is very difficult to catch at times.
Bearish Divergence in Daily charts are strong and should be taken very seriously, if we are in long calls we should keep on trailing our SL to previous low/ trail SL after the low or wait for completion of Range, trail your SL to low, and trail SL to 0.5 level or 0.236 level of range thereafter. Idea is to keep maximum profits in your pocket and get ourselves prepared for the Bear Trend.
2. Phase 2: Bear Phase
Dates: 8/01/08 – 27/10/08: The Bear Cycle:
During the Bear Cycle, Price, RSI & MACD are moving in same downward direction, i.e. with every downward movement in price, RSI & MACD are also moving down. We can see continues Lower High (LH), Lower Low (LL) patterns in the Bear Market. The confirmation of getting into Long Bear sell signal is important.
Signal: RSI & MACD are moving in downward direction in tandem with Price after the All the Time (ATH)
Confirmation to get into short selling for Bear Trend: The best part is to get into selling streak in short selling is when we don’t move above the 50% retracement in Daily. We apply the same method as seen in Chapter 1, we draw a range from High of 6357.1 (Level 0) on 8/1/08 to Low of 4448.5 (Level 1) on 22/01/08 and wait for a retracement upto or just above the 0.5 level or range, we can get into smaller time frame and look for intraday/15 minutes price action where we get a signal on Fibonacci for an Entry or get an Entry once the market starts moving below 0.5 level (on 6/2/08, it started moving down) with small SL. (We will work on detailing again in coming Chapters)
On 4/2/08, market gave a strong breakaout above 0.5 levels, next day i.e. 5/2/08, it created a support (read as low of the day) at 0.5 level and closed above it, also the candle pattern created was evening Star. On 6/2/08, finally Market moved below 0.5 level with a big red candle and continued its downward Journey. (It always very important to watch out for these 50% retracement levels which act as turning point in the market and where maximum changes of loosing money occurs because we are not sure for the direction)
Many a times, market gives a false breakout around 0.5 levels, takes up the top of previous candles and then starts moving down. Example Check market range from High of 19/10/21 to Low of 29/10/21 followed by 50% level retracement from 8/11/21 to 16/11/21. Here on last 2 days, the market breaks the Top or previous 3-4 days, is not able to sustain and then starts moving downward again. (There are numerous such examples)
(We may have to try once or twice for a good entry but don’t over trade)
Continuation of downtrend
The downtrend is continued by forming new Lower Highs (LH) and Lower lows (LL), here the trendline can be broken to form a new trendline. (Lets have a small glimpse of trendline study)
Trendline: From the market high to next high of 50% retracement level (2/5/08), the line joining these 2 points will be your 1st trendline, please remember, there can be slight change in trendline or formation of new trendline after a period of time, check with RSI & MACD for confirmation of reversals.
The trendline breakout is generally followed by a back-testing (after breakout with good bullish candle/s) and again breaking the 50% high, if the 50% high is not broken, it is a false breakout (It may form a double top too), here we had 3 similar examples of new trendline formation:
a. 27/2/08 high, followed by back testing and upmove to 2/5/08 high
b. 2/5/08 high, again followed by back testing and upmove to 12/08/08 high
c. 12/08/08 high, back testing and upmove, we had a new high, but these high didn’t break above the 50% high on 4/2/08 or 2/5/08, we had a breakout, back-testing (28/8/08) and again the previous high of 12/8/08 was not broken and market started moving down again. (That’s how the fight between Bulls & Bears goes on) subsequently we keep on creating Lower High (LH), Lower Low (LL) pattern and the downtrend continues.
Important thing, is to look for patterns creating an uptrend, followed by Bullish Divergence and most important Price moving and sustaining above 50% level. If price doesn’t sustain the 50% level, we are in reversal.
These is the most important aspect that we saw in Chapter 1, where Bull Cycle follows a pattern of creating a Range from Low (0) to High (1) and Price taking a support at 50% levels (0.5 level of the range) or 0.236 level of the range.
Finally, we see a low on 27/10/08 for a time period of 9.5 months
3. Phase 3: Bullish Divergence/ Accumulation stage
Even if we can make out from the chart later on that, the price was the lowest on 27/10/08 of 2252.75, the real test is studying the market after 27/10/08 and finding out when we can expect a reversal and catch the reversal during the time period. After the market has completed a downtrend, that marks the end of Bear Phase.
The Bull phase is yet to start, before that, there is accumulation phase, which is marked by a range bound price movement and rise in RSI & MACD values. Consider Range of, Level 0, Low of 2252.75 on 27/10/08 and Level 1, High of 3240.55 on 5/11/08, the Idea to find out a range is again the most important part, tap for potential reversal around 0.236/ 0.5 level.
Dates: 27/10/08 – 06/03/09: End of Bear Cycle and Pre-Phase of Bull Cycle (marked with red vertical lines)
We continue with our Bear trend, and identify Bullish divergence in Daily Chart.
On 27/10/08 RSI(36) is 30.0 while on 06/03/09 RSI(36) is 42.88, on 05/03/09, RSI(36) is 41.65, and 09/03/09 RSI(36) is 41.9. (I have considered RSI(36) for 3 consecutive days just for the sake of average) over a period of this 130 days, we identify a huge rise in RSI (rise of average 12 points in terms of units), while the price is still range bound and touched the 0.236 level (2485.85) of the range twice, once on 20/11/08 when RSI (36) was 36.25 and second on 06/03/09 creating Higher Highs (HH) & Higher Lows (HL) patterns these difference of Price being range bound while Indicators moving in upward direction is called as Bullish Divergence. (Marked with blue Arrows)
Subsequently, we see channel breakout, backtesting and price making further HH-HL pattern.
Observations:
The price movement during the Bear phase is systematic and moves in 3 phases as described above,
Identification of downtrend trend can be best seen with Bearish divergence and confirmation with price action in the form of Fibonacci Retracement and vive-versa for Bullish Divergence.
For continuation of trend, Price, MA, RSI & MACD are moving is tandem.
Conclusions:
1. Fibonacci retracement can be best used along with RSI & MACD.
2. We can identify signals when small Fibonacci (in 15/30/hourly charts) gives retracement @ 0.236 levels and Short Sell signal for Weekly/ Monthly calls with 50% Fibonacci levels are described above.
3. Reversal patterns can be best identified with Fibonacci when Higher-High-Higher Low patterns are formed.
Notes:
What is Bearish Divergence, Bullish Divergence & Rising Wedge, Moving Average, Trendline & Breakout, there are various youtube videos available
