Trading requires discipline and a sound trading strategy. But if you have taken a look at the Dow in the last week, it's the kind of market where any system could be down. The volatility is so great, it doesn't matter if you are short or long, this market is throwing everyone around like a rag doll. This market is the kind that will break not only a man's pockets, but his spirit's as well. This is the time that separates the strong from the weak. In this post I will explain what will happen in the coming weeks and I hope it brings you peace of mind and resolve during this tumultuous time in our nation.
Phase 1
The market is near the completion of Phase 1 which is a washout to the downside. This process will be swift and devastating. The market will be down 7-12 days in a row. It will feel almost as if the market will never have another up day. This will create so much fear and pessimism in the market that we (me included) will wonder if it will ever end.
Phase 2
The market will have some massive up day that will create a small ray of hope. This up day will be a result from some minor news event, but nothing that would normally create such a buying frenzy. This is the sign that the market is ready to make a 20% to 30% run from the lows. Depending on where the Dow stops, right now that would represent close to 11,000 on the Dow Jones. This move will provide limited opportunities to jump on board because it will give the feeling that you are chasing the market.
Phase 3
Just when everyone thinks the market is ready to reclaim itself, there will be another sell off. This sell off will be slower in pace and choppier in structure, but it will retrace right around 78.6% of Phase 2. This pullback will have everyone back on the bear wagon and the shorts will load up.
Phase 4
The market will then begin to stabilize itself right when the end is near. The market will then grind higher for an extended period of time and either exceed the previous highs, or come close.
You don't have to take my word for the 4 Phases, take a look at what happened in 2001. You will see this pattern repeat itself in many of the major bull markets in U.S. History.
