by Poly, Zentrader
Bear markets can be a very humbling process, and this one has certainly been up there with the best of them. The important take-away from living through these types of environments is to allow yourself to “stop and smell” the action. In the investing world, these are not random outlying events. The saying “there is always a bull market somewhere” could also be expanded to include “there is always a bear market somewhere”.
So to be better investors, we need to take note of how these events unfolded and what role we each played during the entire process. I know some members were completely sidelined, agnostic to gold and content to see it crash. But I know that a good portion of members have a special fondness for gold, and in varying degrees this bias has cost them some of their capital. So for our own personal investing development, it’s important to remember how your personal biases impacted your decision making process. By acknowledging and reviewing our trading and investing practices during these events, we can appreciate the psychology and emotional state needed to better manage and succeed through such events in the future. If this was your first bear market, falling victim to new experiences is what learning is all about. Once we accept that all bear markets (just like bull markets) are alike, you will have the ability to approach the next bear market through a completely different lens. This will not be your last bear market (in any asset) and invoking the experiences of this bear will help you through the next.
I’ve personally been involved in a number of Bear Markets since the 90’s, and even so in hindsight I’ve allowed some personal biases to influence how I traded some of this Bear Market. In one breath, I’m happy to say that losses to this bear market (considering miners are down 70%, gold down 40%) were pretty well contained; adherence to a tight risk management process in the end cushions any errors. But an unbiased review of past trading uncovers that since gold broke below $1,523, I should have acted upon what became a bearish Cycle outlook. Once that level was lost it was clear that the Cycles were in a true downtrend, so the prudent strategy was to only look for short opportunities near the top of each Daily Cycle. I’m capable of going long or short any market, so my failure to execute a short strategy on what were clearly declining Cycles will now become an experience that I expect never to repeat.
As for the future state of this bear market, again I plead “partial” ignorance. That’s a position I’m happy to take as I’ve experienced enough of these types of markets to know that you just can’t fight the tape. Big bear markets end with true capitulation on an avalanche of selling. Sentiment reaches such extremes that even the most hardened bulls openly question their established belief system. Bears launch into a tirade of articles and publicity boasting how they called and profited from the move. By the end of the bear market, it just seems as if the asset is “dead in the water”.
It’s very possible that we’ve finally seen the bear market low indicators described above play out. But that’s just the problem, bear markets can go on for so long and fall to such extremes that you never truly know if it was satisfied. It’s only through upside action and the development of new bullish charts and Cycle counts can one truly can say that a bear market has ended. What I believe is if gold is still in a secular bull market, then this is awfully close to one very significant bear market low. But let’s not forget that this bull market is 12 years in, trying to put a time frame on when this 18 month “cyclical” bear market will end is a useless endeavor.
With that said, Friday’s powerful reversal has me convinced that a new Daily Cycle is born. Based on the depths of this DCL it’s only natural to expect a decent (at least counter-trend) rally back up to the declining trend-line. But that’s about the extent of the “high probability” trade that I’m willing to predict. We can’t argue with the fact that this bear market remains in effect until proven otherwise, and therefore a rejection at that declining trend-line ($1,330 area) is a very reasonable expectation.
This as is an excerpt from Wednesday’s premium update from the The Financial Tap, which is dedicated to helping people learn to grow into successful investors by providing cycle research on multiple markets delivered twice weekly.