A trader’s psychology…
There was a study done that shows it only takes a third of a second to decide to buy a stock or let it fall to the wayside.
Any time more than that is just you trying to rationalize your position – as you should.
This is extremely important because the market is controlled by these choices, and as a trader, you go through a cycle of deciding and rationalizing time and time again, resulting in patterns.
There is a pattern I’ve shown you numerous times, both on the morning show and right here in my newsletter.
It’s the four stages of a rally or decline:
I’m not going to go into too much detail on the core of this right now. If you’re interested in that, you can read it right here.
But in layman’s terms, the four stages go like this:
- Nothing can go wrong
- This is just a hiccup, the market can’t go down
- Maybe I should get out of the way…
- Nothing can go right…
And right now – and, really, for the better part of a year – the market has been stuck on the second stage: disbelief. And this is the stickiest of stages because we can be held at this point without any merit, based on hopes and dreams alone.
You need to look at this chart on BTC and remember one thing: this WILL happen in the S&P 500, the Nasdaq 100, and every other index in the market before we can start to say “everything is clear, let’s buy some stocks again.”
When looking at this chart, you can see all four stages of the sentiment cycle laid out clear as day (I’ve noted them on the chart to keep things simple).
You can see back when BTC hit its all-time high as we were heading into the end of 2021, which was shortly before we hit the euphoria stage here in the equity market.
After that, people started to see BTC drop, and they were saying things like, “Bitcoin is just suffering from a correction or pullback.”
This gave people the indication that it was time to buy more, which is what caused the sideways movement that we call “denial.“
Everybody was still running on the high they had felt just a few months earlier…
This is the exact same sideways movement we are seeing in the market today. Don’t believe me? Check this out:
Almost a year… we have been moving sideways for a year, and people have been trying to say, “This isn’t a real bear market.”
When in reality, it is… and yes, we have seen the market move up on a day-by-day basis at times, but when you zoom out and look at the bigger picture, there’s been no meaningful movement.
So what does the next step look like?
Well, let’s go back to the chart on BTC and see what the “acceptance” phase looked like there, as it’ll give a strong indication of what’s to come in the future of the equity market:
Once we saw BTC break below the lows it found during the denial phase, people started to throw their hands up thinking they have to sell and get out of the way with plans to come back when things cool down.
Many of them – like me, in this case – bought at the highs and lost nearly half of their investment.
Don’t worry about me though, I was buying the whole way up and again at the lows based on some conversations with our resident potato farmer.
Regardless, this was the beginning of the acceptance phase. Things were about to get a lot worse, as you can see…
Then comes along a catalyst for BTC to make its way even lower in a hurry… Sam Bankman-Fried…
This guy deserves a reward, as his mishandling of investor capital (sounds SUPER familiar, right?) allowed us to transition to the despair phase.
That’s where the magic happens – the first bullish signal in BTC in a year.
But it’s at its lows CJ, how is this bullish?
That’s likely the question you are asking yourself.
Well, the despair phase is the first bullish phase we have talked about today because it takes place when we hit a fundamental bottom.
That means the only people who are still left in BTC – or the market – are the true believers.
This phase tends to be quick, as those that are still in are scooping up shares and fortifying their position for what’s to come next: the denial phase, again…
Only this time things are a bit different, as people are fearful of the markets, and in the case of BTC, people might even think that it’s a scam.
This is when things start to turn around and climb higher again. It’s an anxiety-inducing safe zone that most people will not be willing to enter, but that is exactly the time to start making moves.
This is what has been missing in the market over the past few months, and it’s because we trade it differently than crypto.
Right now everybody and their mother is just throwing cow pies at the wall and seeing what sticks, and unless you know how to do it and you’re with somebody like Kenny, this move can be VERY dangerous.
People have lost their purview in trading, and we need something to whip everybody back into reality before we can experience the capitulation that the crypto market just went through.
Now, what might that catalyst be? Well, it could take many forms, but the current financial situation with Silicon Valley Bank, Credit Suisse, and now Deutsche Bank is giving traders yet ANOTHER opportunity there’s trouble on the horizon and accept that this market is not what it appears to be.
I don’t know about you, but three bank failures in three weeks seems like the perfect catalyst to scare this market into capitulation and allow us to follow through into the despair phase.
Make sure you join me in the main room tomorrow morning for The Long & Short of It at 9:45 AM EST so we can go over Deutsche Bank and what happened over the weekend, and we’ll watch the market continue to tremble together.
I’ll see you there.
March 25 2023