Chapter 5

The Range Is Your Friend

All things entail rising and falling timing. You must be able to discern this.

—Miyamoto Musashi

Sideways

We use the terms bull market and bear market casually, assuming that if we’re not in one type of market, we must be in the other. That kind of binary “If not A, then B” logic is a very common analytic tool. It’s also rarely applicable to human affairs, though it is used constantly in mass media’s discussion of markets. When attempting to convey a message in easily digestible packets of information, nuance is often sacrificed and one is either a bull or a bear on whatever the topic of discussion is du jour. Ultimately, though, that kind of thinking is very detrimental to critical analysis of a situation. Not everything can or should be reduced to their rhetorical extremes.

If we look back over the past 100 years, we see a number of secular bull markets and only one true bear market, which would be the period of the Great Depression. The rest of the time the general market has traded in broad consolidation ranges.

It is the stated role of the central banks to mitigate the effects of a massive depression by providing countercyclical liquidity during times of credit contraction. Therefore, it is safe to assume that, given the history of the responses of the central banks since the Great Depression, it is very likely that the probability of a true bear market is rather low. In other words, their jobs are to arrest the crash by inflating the money ...

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