Many years ago, I was taught the "4 Phases of the Market" and understanding them has made a huge difference in may trading and investing over the years. Once you understand them, you can use them to your advantage. The 4 Phases happen on a micro-level and macro-level. For example, you can go through all 4 phases in the span of a month on smaller chart time frames. On a macro level, they are the phases of bull and bear markets. They are as follows:
Disgust is the end of the 4 phase cycle. It is when there is significant uncertainty and volatility with enough selling to make things painful in the markets. This stage "feels" horrible and like it will never end. It is most notable on big corrections such as 10% or more and bear markets. Everything is negative and it seems there is no end in sight for the carnage. You can also go into disgust on shorter timeframes with
3-5% moves in short periods of time such as a week or so. The telltale sign of this phase is fear and uncertainty. The end of Disgust is one of the best times to sell options in the markets because of the volatility and depressed levels.
This comes after Disgust in the form of a rally "in disbelief." Everything has been so negative and has seemed like there is no way anything positive can happen - and then the market (stock, index, etc.) rallies and holds the rally. Sentiment is that it cannot hold and many times it doesn't. You can get a lot of confirmation of Disbelief during the Disgust phase as rallies are faded, but when things reach the deepest levels of Disgust is when Disbelief really happens. Pay attention to the sentiment and prevailing narrative of "the herd", when it seems all hope is lost and the world is going to end (OK maybe a little over-exaggeration, but you know what I mean) - that is when you should be prepared and look for the Disbelief rally.
Once the Disbelief rally holds, it becomes somewhat of a self-fulfilling prophecy in that early adopters (the Pros) see it and start to get back in. Still, the herd thinks it cannot hold. They stay on the sidelines as they miss the beginning of the rally, but much to their "disbelief" it continues to hold. Things start to "feel" better and markets get back to more normal action. After a little while, the rally begins to reach "Acceptance" and it draws more people back in. You can always tell acceptance when the fear begins to fade and markets revert back to normal type market action (not wild swings, etc.). You can also tell by sentiment in that people that were scared are now dipping their toes back into the water. This phase also lasts the longest.
This phase is most easily recognized when things get really hot again and it seems like everyone is making money in the markets. "You can't lose!" This is a great time to be in the markets and take advantage, but you must be very weary that "Disgust" is lurking and coming next. Telltale signs of Euphoria are risk assets being piled into. Non-traditional assets suddenly are all the rage and people who are not investors piling into the markets. The old adage, "When you barber or dentist starts giving you stock tips, or brother in law who has never traded before, start to give advice, you are usually in Euphoria" and probably closer to the end. Look for markets to go parabolic on the charts and further than anyone expects prior to the end of Euphoria.
Once you understand how to recognize the 4 Phases of the market, it will make a huge difference in your investing and decision making around it. As I write this, we are in early 2022 in the Disgust phase. I cannot say how long it will last, but I am excited about the opportunity to "be greedy when others are fearful" and take advantage of selling into the corrected levels it presents!
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