Not in the sense that main principles have been shattered or macrocycle theory questioned… We dare to say that recent impacts and those we foresee to come, will have major implications on trading systems. Typically, we deal with a brief impact like a bubble or an event and markets recover from such resulting crashes in a foreseeable future. Not this time. In our humble opinion, more downturns (in the percentage magnitude that we have just experienced) will follow.
Once the bottom is reached it is likely that a bottom building phase could take as long as one to three decades. What does that mean? Have markets changed forever?
The recovery in the stock-market could be quite lengthy
Let us give an example. While typically long term investing (i.e. retirement savings) survive temporary drawdowns since they trend and compound, this new market might not provide many opportunities for long term directional market bets. We can also expect a massive inflow of ill-educated market participants. Typically, such speculators only join the game at the end of a bull run. Greed is the main motivating force, and professionals sell into this crowd. Now, due to expected devaluations of currencies, literally, everybody is addressed to be a market speculator, to protect their cash. The list of examples like these is long. Markets for a long time have been mismanaged and a domino effect tumbles now many of these card houses. The recovery in the stock-market could be therefore quite lengthy.
We assume that both, the macro and micro side of typical trading system behavior, will be influenced on a massive scale.
Bitcoin Monthly Chart, Markets Compressed:
Prices touched support (bottom white line) for the third time now on the monthly time frame. This has weakened that support. We might be in for one or two more emotional waves through the world markets. Most likely even the safe haven instruments like Bitcoin and precious metals will temporarily get another one or two legs down. These down legs could be as severe in percentage as what we have seen in recent weeks.
Litecoin Daily Chart, Abnormality – Opportunity:
Another phenomenon that can be taken advantage of is rewards proportionally being larger to risk in this unusual volatility. Typical single events have a quick peak of fear and then emotions settle down. The brief phase of volatility and fear can not easily be taken advantage of. In this special case of a pandemic, worries continue for a long period of time. Consequently, the market speculator seeks for security within the markets as his or her main goal. As a result, simple technical analysis is working very well since markets reflect mass intention. And in quickly declining markets for example, volatility is only manageable with wider stops. In our case, however, stops can be tighter while profit targets are still more generous. Consequently, risk-reward ratios expand.
We were already able to take advantage of this “abnormality”. The daily chart above shows the trade of Litecoin (LTC) that we just closed out. Our final target generated a profit of 46.89%.
CureCoin Daily Chart, Percentage Move Change:
The daily chart above depicts Curecoin (CURE). We just closed out the runner of this trade (see our Quad exit strategy) with a 246.94% profit. Unfortunately the principle we would like to illustrate can go both ways though.
Assume most markets declining on a high percentage figure. What this represents is that percentage moves between the two smallest price figures increment rise. This warrants for careful money management adjustments as well as technical analysis tool re-calibration. Especially for trading vehicles that are trading heavy (highly liquid).
Markets changed forever?
It is nothing new that trading systems have expiration dates. What is noteworthy is that change will be so rapid that the adoption rate needs to be quick. Bull markets ended when we came into the twentieth century (“Dot-com bubble”). Many professionals who were used to mainly bull market behavior for over thirty years, got wiped out completely. We are at a comparable spot right now. Just more severe in its development phase.
We would like to make the point that anybody who has been successfully participating in the market up until now should not assume that market movement will stay the same. Market behavior is a reflection of human behavior. While there are basic behavior models deeply ingrained within us that shall not change, the world as we know it has. It changes into a new era now. These changes are multifaceted and will reflect in technical analysis and its probabilities as a whole, both in micro and macrocycles.