Study History, Tools To Trade Bear Market


Simpler Trading Team

8 min read

In this article:

  • History reveals setups in current market
  • Study macro signals, U.S. dollar “truth”
  • Adapt strategies as bear market runs wild

The current trading world can be a daunting task for the “little guys.”

Retail traders must navigate a volatile market hinting at collapse – an uncertain, bear market cycle not seen in years.

How do you find an advantage – the tools to trade a bear market?

Learn more from these lessons from a previous Simpler Insights.

Taylor Horton, Options
Jack Roberts, Futures
David Starr, Fibonacci
Mary Ellen McGonagle, Stocks

Turn to history, tools for bear market

The current market chaos has traders struggling, but this environment has been seen before.

The 2000-2001 dot-com bubble bursting is eerily similar to what is happening now.

As history shows, speculative investing and low interest rates triggered an overbought technology market with unjustified high prices. In 2001, high-valued stocks lost 100% of their value from the runup. The technology bubble burst, price action chopped back and forth, and then finally corrected.

Those were dark days in the stock market.

Today, there has been a runup in overbought technology stocks, price action has been chopping through volatility, and this month ushered in another sharp correction that held the market in darker bear territory.

There have been bounces, like recent rallies with all three major indexes adding positive gains.

So far these bounces tend to be short-lived spurts feeding hope to bullish-minded traders.

Experienced traders have seen this market cycle playing out for some time. For newer traders, and some with time in the market, it may be hard to understand that this rough spell is part of market action, i.e. historical cycles.

John Carter, Founder of Simpler Trading®, has been following this market closely – and winning in the turmoil.

Study four market cycles in wild market

Much is unraveling in the market today.

Cryptocurrency is flailing, the dollar is exploding, economies are imploding, inflation is punishing consumers, the threat of war is a constant worldwide news topic, and interest rates are rising

The world has changed, and so has the market.

John shared how there are four market phases (like the cycle leading into and after the dot-com bubble) traders should know.

  • Accumulation – This is a long period of consolidation (chop) after a six-month decline. The 200-day moving average (MA) is flattening.
  • Advancing – This is the breakout from the accumulation phase. This cycle forms an uptrend with price holding above the 200 MA.
  • Distribution – This is a long period of consolidation (chop) after a six-month advance. The 200 MA is flattening.
  • Declining – This is a period where price falls below the 200 MA and traders tend to become long-term investors (begging out of trading).

Since the losses at the start of the pandemic, the market has cycled rapidly through these phases and into the declining stage.

Recent losses in this transition have been swift and unexpected by even experienced traders.

The transition has been rough for traders who for years grew complacent that the market would continue rising no matter what happens (even a pandemic didn’t totally crash the market).

“It’s easy to get lulled into complacency, it’s easy that we get conditioned that we expect the market to behave one way,” John shared. “And when that happens, if we don’t change our strategy, it just becomes more difficult to trade.”

The goal is to stay on track with what the market is actually doing versus how traders get conditioned to expect how the market will behave.

Many traders are following the wrong strategy in this phase of the market.

Traders have to adapt strategies to how the market is actually performing.

‘Big view’ factors feed bear market

Talking about the “right” strategy may not go over well with traders struggling to keep their trading account in the positive.

There are macro factors contributing to this market environment, but one contributing factor to watch is the U.S. dollar.

The reason to look at the dollar right now is that it is the chart of truth,” John said. “The higher this goes, the more things are breaking.”

Following the dollar reveals that much of the debt around the world is in U.S. dollars. As the dollar rises, more and more currency is needed to make debt payments.

A rising dollar doesn’t point to the exact cause of market instability, but it does show that the market is facing trouble and something will happen, according to John.

As this powder keg builds – in combination with rising interest rates (set by the Federal Reserve) and inflation (commodity prices rising rapidly) – what breaks is expected to unleash havoc on the financial system.

“In a nutshell, we are experiencing the fastest tightening financial conditions in history,” John said.

Some would argue against the speed of the tightening, but traders have to consider all factors in combination.

“On their own, each one of these individually (dollar, interest rates, inflation) represents a huge tightening of financial conditions, but the combination of all three is unprecedented,” John said. “That is why we’re seeing destruction in some of the more speculative assets, and that is going to continue. And it’s important to understand that.”

Another factor indicating this decline is how leading stocks, “pandemic darlings,” have fallen off, particularly in the technology sector. An example Simpler’s traders are following is Apple.

Apple arguably may be the lynchpin supporting the market and if it falls the market could spiral downward. Apple grew from a pandemic low of $57.21 in March 2020, but is down considerably since Jan. 1. Apple is a leader in the technology space and a high-value stock within the Dow, Nasdaq, and S&P 500.

The dollar, interest rates, inflation, and leading stocks are contributing to the onset of this declining phase of the market.

What traders must understand is that, no matter the contributors, this phase is at hand and strategies need to be adjusted.

Tap into market with team, tools, strategy

Simpler Trading has developed a diverse community of traders working to trade any phase of the market.

When facing this declining market, find what works for you as a trader:

  • Find a mentor – Trading alone is tough, especially in a market environment dominated by computer algorithms. An experienced mentor offers a sounding board for what is happening, what to look for ahead of market shifts, and insightful training that only comes from “been there, done that” skills learned from losses and wins.
  • Use good tools – These don’t have to be premium tools. As John shares in his mastery program, taking a step back to review history unveils “classic” tools that can work well in this market cycle. He opens the book on his long-standing tools available to traders.
  • Build a strategy – This can’t be stressed enough – this is a rapidly changing market environment where previous strategies (think “buy the dip”) tend to get traders in trouble. This market could go lower, much lower, and traders must learn skills and adapt strategies to navigate a bear market that enjoys swallowing traders’ accounts in one fast gap down.

This year has been a tricky “unwinding,” to say the least, and traders need to learn how to trade what the market gives.

‘Look back’ to trade bear market

Finding a starting point to study and learn how to trade this market can be tough.

Like for John, it has been years since a declining cycle hit the market.

“Let’s take a deep breath and see where we are in this market, and what are the setups that work best in this environment,” John said. “We all know nothing goes straight up or straight down forever, but we also need to recognize when the direction of major order flow changes based on huge macro changes.”

To help traders, John has taken a position of “looking back” at how to trade the current market.

He works to answer nagging questions: “So what do we want to do now?” “What’s happening?” “What do we look for?” “What do we expect now?” “How do we trade this cycle?”

Trading has never been easy, and now the market is even more tricky.

John breaks down free tools (classics like the squeeze and institutional bands); adapting strategies to take on a changing market; and his “fall back” trading arena – think indexes.

“They can make your life easier in this type of environment,” John said. “I always go back to my roots.

“I’m going to show you all these setups, and I’m going to show you with tools that are free tools on most online trading platforms.”
If you’re ready to learn a timeless strategy and tools for a rough market, check out his program.

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