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The bull/bear cycle has tracked all bull and market cycles moves over the past century, and divides stock market action into four distinct phases, with one phase following the other in a predetermined cycle. The current phase is a high risk blow off that eventually will morph into the next Great Bear. Past high risk phases was 1929, 1972, 1987, 1998, 2000, 2007, and all suffered a major crash of stocks, with the average loss near 50%, which I have termed Great Bears.
What is required to turn a high risk blow off into the next Great Bear is the presence of a big bear win on a correction. Which, in English, means the trend trading indicator line at the bottom of the chart below turns dotted as the stock market trend turns negative then rises above the high risk - exit (shorts) - line where the yellow circle resides. Update continues below chart...
Any correction that sees the trend turn positive without the trend trading indicator crossing the high risk - exit - line leaves the high risk blow off in place, with a rally to new highs the likely result.
This game of chicken between the bulls and bears of surging rallies to new highs that soon falter and slip into corrective mode repeats and continues till that big bear win lands. Once the trend turns negative - probably later next week - the correction will end in one of three ways.
1) The trend will turn positive again without the white contrarian line at the top of the chart crossing the oversold extreme line (in which case reverse short positions and go aggressively long for an end of year rally.)
2) The correction will run long and deep enough the white contrarian line crosses the oversold extreme line, though with weak downside momentum that leaves the ADX line trending down (in which case reverse short positions and go aggressively long for an end of year rally.)
3) The correction will run long and deep enough the white contrarian line crosses the oversold extreme line with strong downside momentum that turns the ADX line up (in which case hold shorts until the trend trading indicator at the bottom of the chart crosses above the high risk - exit - line, then buy expecting a partial recovery bounce.)
The bottom-line is the stock market has entered a very tricky period that will eventually lead to a significant rally, with the prime question just how far and fast we fall before the stock market is in position to rally, with an end of year rally the likely outcome if the correction is shallow, versus a recovery bounce as part of the next Great Bear if the correction is swift and deep.
The blue line in the chart above is the 2007 bear start, while the purple is the 1987 bear start, both high risk blow bull off years.
If the bulls survive the correction then we repeat this enter process next year, just as we did in 2011, 2012, and this year. When the bears score the big win - something they failed to do in 2011, 2012, and so far in this year - bull game over and the next Great Bear begins.
The chart below shows what comes next once the bears score that big win that forces the trend trading indicator across the high risk - exit - line marked by the yellow circle (which corresponds to the yellow circle in the chart above.) The red and green circles that highlight clustering of the contrarian and trend trading indicators are trades I expect to make once the next Great Bear begins.
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Disclosure: I am long PSQ.