Let's talk about the classic bubble model

The problem with "Return to normal".

You know the chart I’m talking about. We’ve all seen it by this point.

If you’d not seen this before, you’d sometime between 2020 to today I’m sure you’ll have seen it.

Firstly, I love this model. I’d estimate it about seven or so years since I learned about this and it has a lot of utility in giving you an overall template of how a bubble will form and fail. It’s great for that … but that’s theory. When it comes to making real trades, it’s not that easy.

Sadly, the run up is not as smooth and there’s not one nice and simple “Return to Normal”. In reality, there’s going to be at the very least three false “Return to Normal” spots. Fading the expected point for this in an uptrend that has not fully matured is a very painful thing to do.

There are various other ways in which the implied moves of the model and the functional moves of the market are very different in terms of trading this model but this piece is not intended to a general theory piece. It’s to discuss our current situation in the market. Most bears think we’re in the bull trap, we’ll focus on that.

Black Berry (BB)

A favoured chart of mine because it’s a great technical representation of how a boom and bust tends to form. I use BB in examples for bubble moves often, mainly to demonstrate the risk of the myth “This company is going no-where” means it’s a good buy and hold.

Here BB is at 122. It’s going to 4! What part of the cycle are we in?

Hopefully given the fact this post exists and you’re reading it tells you this is not going to be the simple “Return to Normal” bull trap. Without that context, it would be a very compelling model. Especially if for some reason you knew a bear move was likely (This was in 2008, there were clues).

Here is what actually happened. First on a small chart with the expected bull trap rally and fibs marked in.

And now on a big chart to give you a sense of context of how small this move was and how costly it would have been to be squeezed out because you were over-committed into this rally.

And this is actually quite typical. I could spam big crash charts that look like this at you all day long, but instead we’ll just go for one really old one and one really new one to show how it’s always been essentially the same.

RCA. The Darling of the 1029 picks for retail. Known and documented to have been an organised pump and dump (Back in 1929 this was not illegal).

And BTC. Which one may be able to make a fair case for having been a massive pump and dump and if you go and look at the charts of the micro cap coins that are proven to be pump and dumps (Still not illegal) you can find they all have a similar tone.

To show this has also held true in indices, here’s Nasdaq.

And SPX.

Please note: In all of these charts the factors that would cause the crash were known at the false “Return to Normal” section. In late 2007 there were already mentions of the “Sub prime crisis” in popular newspapers. A critically thinking bear would have been able to make water-tight seeming short thesis’ in the “Return to Normal”.

It’s a compelling trap. Even while I know from experience I need to be alert to this risk, I routinely fall in this myself. Here’s my forecast using the bubble model to forecast us in the “Return to Normal” stage. Did this a while ago.

This might be right, but have a look at the little chart next to my name in the top corner. That’s not the SPX chart. This is a BTC chart that was done in early 2021. Unfortunately I only have this in thumbnail form now but I keep it there on TV to remind myself (Another others) while an overall forecast can be correct the market is tricky.

This was my forecast.

This was basically right - but there were a lot of things that went wrong along the way. Adjustments were required or this overall correct forecast would have certainly lost money. I’d have been unlikely to be able to execute it on the real drop.

Here’s a forecast of the TSLA bubble using this template at 800.

TSLA would go to over $1,000. More like $1,200. It would then make the classic crash. In theory, the forecast was right. In trading, it needed a lot of work and adjustments to what was happening along the way.

I think the forecasts/results show here are quite impressive. While there are limitations these really speak the overall usefulness of the model and, although we’re talking about a much more serious occurrence, I think using this model for a big crash thesis in indices is perfectly valid - especially with a supportive fundie background.

However, if we’re setting up a correction to a huge net uptrend of 50 years (Which I think the charting strongly supports), you have to keep in mind how entirely nominal a move it really is for the market to spike a high relative to the scope of the move we’d be talking about.

It’s absolutely nothing. It’s entirely inside the scope of what would be fair game for a stop hunt. If the market is due to go down that much and the larger and smarter players in the market are aware of it, it’s well worth the effort to create this move. It could come without any reason (Although a compelling news narrative at the high is most common).

If you think the above drop is too bad to happen (It’s not, it’s much worse than people expect to happen) the same really still stands true for a standard crash taking us under the 2020 rally. To run the stops really is fair game and if bear patterns that have high success rate in a bear market are failing, you should consider that’s telling you the leg you’re trading is not a bear move.

As always, there’s no way to ever be sure we know the future - but based on the past this is very high probability move. It has a lot of potential on both sides for speculators and it has unacceptable risk for bears. The amount of value you’d lose being incorrectly short here is too high.

From a hedging or speculating perspective you’d be cutting you gains by easily 50% and I’d venture to say up to 90% depending on how good your strategies are when it works and how much you spent betting on it them too early. And right now is the moment where it’s very cheap and easy to protect yourself from that.

If you take longs in this area, these would then allow you to short all the rallies all the way up. If it’s a tricky move and runs right through all that happened is you spent your running long profits. You’re still in shape to take a short into the spike out and still eager to build a short if it is working.

Without taking protective actions, you will have a very stressful time. I’m saying these things to my bear friends and followers in a sincere attempt to help. I predominately trade as a bear. Traded bear moves in the Forex markets for a long time. Traded all the recent bear moves. Being slightly early hurts a lot.

The cost of insurance at this point for bears against the failure of the easy textbook model of a drop and the formation of the much more realistic price move formation is really low and the cost of not having it and it happening are exceptionally high.

From the perspective of the speculator, this is maximum opportunity if you know how to deal with it. Imagine if on this breakout you’d worked out the probable move for BTC was to spike out the high and then enter a true bear market.

We could be in that spot now in indices. Betting on us being in that spot is very low risk and we find out quickly if we’re wrong and should stop doing it and the potential rewards of being correct more than compensate for the risk taken.

See full trade plan. Primary trade plan for coming months. for SP:SPX by holeyprofit — TradingView