Articles

By: Chris Rowe — February 1, 2019

Why Different Markets Warrant Different Rule Books

Happy Groundhog Day!

CHRIS

This past Tuesday, you heard me say that you could learn to forecast the market like a weatherman.  That is, in a way that has you come out on the right side of a trade much more often than the  wrong.

The key to this feat of market magic is: Technical Analysis.

It works because the market moves in patterns, and Technical Analysis allows us to learn from those patterns and to recognize what's likely to happen tomorrow (so to speak) based on what we can see is already happening today.

In the Bill Murray movie Groundhog Day Murray (who plays a weatherman of all things!) finds himself living the same day over and over for what seems like an eternity.

Now, the market doesn't repeat daily, of course.

But its pattern do "repeat" often enough to give us a leg up, if we know what we're doing.  My job is to make sure you know what you're doing.

Recall that Technical Analysis works over the intermediate term much better than over the very short term or the long term.

Today, let's look at market patterns from another angle...

In my Technical Analysis Millionaire course, I make it very easy for you to figure out what kind of market you are in, and that’s a critical difference between making money in the market or losing money in the market.

There are four basic types of stock markets, and each requires us to follow a different set of rules.

One part of the investing universe that I find most fascinating is that most traders or investors use the same rulebook for all of the four markets -- a mistake that can cost you your trading account.

Some folks may feel they're smarter because they adjust their trading styles to fit two different kinds of markets: up or down.

Imagine a guy who dressed in a heavy down coat, mittens, earmuffs, a scarf and three layers of clothing no matter what country, state or time of the year he was in.

Or imagine another person feeling smarter than that first guy because she not only owned have heavy coats, mittens, earmuffs a scarf and boots, but also owned tank tops, T-shirts, shorts and flip-flops.

I don’t want to take that analogy too far, but the point is that there is a lot of “in-between” when it comes to weather.

Fortunately there isn’t as much variety in the stock market as there is in weather, so we only need a playbook for markets that are either: “basing” (bottoming), “mark up” (advancing), “distribution” (topping) and “mark down” (selling).

Are we in an overbought market that responds to things like strong corporate earnings announcements, GDP numbers, employment situation, etc., by selling off?

That's just one kind of market we need to recognize (when we're in it)...

... because we would play it differently than another type of market.

That type of market I just described might be one you see at a top -- where stocks are just overvalued.  But we can also see selling at a bottom, where there's just panic.  How do you play that?  How do you know when it’s happening?

As times change, and markets evolve, attitudes change with them.  That's because human nature is predictable and works in cycles and patterns (like the weather).

The same patterns are reflected in the prices of assets humans trade.

While humans in the 1850s were wired the same way as they are today...

If you shuttled back to that era in a time machine, you'd probably have hard a time navigating through daily life.

The same goes for applying the wrong rule book to the stock market you’re currently in.

You'll be hearing more about this as we dive deeper.

See you soon!

Chris

CHRIS

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