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Learn to Love Those Bear Market Rallies

Tristram Waye for Bitvo | Oct 6, 2022

Doug Casey - Learn to Love Those Bear Market Rallies

Get used to the bears (but don't get too negative)

Crazy is just getting started. Which is saying something after three years of cray cray everywhere you look.  And there is a lot to be bearish about overall. Extreme market negativity is more than simply a bias.  It’s an emotional commitment.  And it’s the kind of commitment that can cloud your judgment and cause you to miss periodic market inflections. These inflections are powerful bear market rallies.  And these rallies can represent key opportunities in a bear market.

  • Sunday, September 25, the British pound got tagged to lows not seen since the mid-80s.
  • The DXY looked like one of Elon’s SpaceX ships heading off into space.
  • We are just starting to see destabilizing moves in various assets. Geopolitical events are taking shape into a season of important catalysts.
  • Crypto hasn’t been immune to these market moves as it trades around wider market expectations.
  • Don't be too negative:  And as you look around at the market commentary during this period, you may find yourself experiencing something similar. Everyone is trying to steer your focus, emotion, and action. If it hasn’t happened yet, the onslaught of narrative and “news” may catch up with you eventually. You want to actively avoid getting too negative because being too negative in this environment is more than just an emotion. When you’re this committed, you won’t see a juicy bear rally developing. And these rallies can be an important part of getting through a bad market.

Middle of a moment

  • As I’ve written before, I believe we are in the middle of a moment that will define monetary history well into the future.  And part of that will be the story of a financial system that was so fragile that it required trillions in stimulus one year, followed by a monetary beat down two years later.  You gotta wonder if they would have been better off doing nothing at all.

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  • Now, every day seems to have another financial surprise.
    • A systemically important European bank with exploding credit default swaps, begging the question, Lehman 2?
    • A major currency dropping like a bag of hammers. A central bank forced to abruptly change course.
    • A tightening labor market in a recession.
    • Fragile supply chains.
    • Fuel prices that are shaped by policy constraints and catastrophic policy errors.
    • Sabotage on the high seas that looks like it’s designed to provoke conflict.
    • And the Fed is acting like James Dean in Rebel Without a Cause as it plays chicken with the economy.

See the action through timeframes

  • In an environment like this, you have to step back a bit. The way you can do this is to think in timeframes. For example, you could have different trading biases for the short, medium, and longer-term time frames.  So you can be short-term bearish and long-term bullish. Or the opposite.
  • Whatever your outlook will depend on the way you are approaching the market and what your analysis and expectations are.  This gives you space to do things that might not conform with one of your other time frames.

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  • For example, you can use a portion of your trading account to get long for a short-term rally in a bear market. Or you can cover a short and go neutral when your objectives are met, even though you might still be looking for downside. Or you can use these rallies to shovel some out and reposition for a resumption of the trend lower, where you can buy some back cheaper.

How those bear market rallies develop

  • You’ve seen liquidations in bitcoin and ether many times. We explored them in an article on leverage and one on technical analysis.
  • For a quick review:
    • The market gets caught by surprise. Levels get cut through. Positions get blown out, particularly leveraged positions as the margin clerks toss position liquidations into the flaming abyss of a decline. A cascade can develop as a result.
    • Stops get triggered.  And those that can no longer take the pain, sell.
    • Those short into the decline use those liquidations to cover and buy from short sellers late to the party.
    • As the liquidations and sell-side flows disappear, there is an air pocket leading to a rally. The bottom fishers flip their positions out for a quick gain.
    • Late short sellers run to cover their positions, and off it goes, giving you an opportunity to reposition or lighten up.
  • When you’re too negative, you miss these moves because your flexibility disappears, and your creative thinking gets turned off. Keep things tight and your firepower at the ready, cuz it looks like a lot more shizzle might be on the way.

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