We all know that even in a bull run, the stock market does not run up in one straight line. It always move in a zig zag way. So what is the characteristic of the move upwards?
There is a classical technical explanation to the movement and I have learnt this from “Technical Analysis Explained” by Martin Pring. Generally, a bull run has 3 intermediate cycles. Looking at the figure, each intermediate cycle consists of a primary intermediate price movement (indicated by blue lines) and a secondary movement (indicated by red lines). For example, one intermediate cycle consists of line 1 and 2. An intermediate cycle can last from 6 weeks to 9 months. The secondary movement can lasts 4 weeks to 3 months.
The primary intermediate movement is lasts longer than the secondary movement. The former gets it’s name as it is in the same direction as the primary trend. The first secondary movement (numbered 2) usually retraces 1/3 of the first primary intermediate price (numbered 1). Number 4 usually retraces 2/3 of number 3. And lastly, number 5 will rise very steeply as many retail investors are pouring funds after the market has proven to be bullish. This euphoria will not get them far and this would be the last stage of the bull run.
Although this theory characterises the bull run well, it must only be used as a guide. The duration stated above is only a rough gauge and there maybe more than 2.5 intermediate cycles (or 5 phases) in a bull run. The more accurate warning is when the market shows sign of euphoria, that is when the stock price is rising very steeply.
So now let’s take a look at the current situation. I would say phase 2 just ended and now we should be in the beginning of phase 3. Phase 1 was the recovery after the market bottom and the STI recovered 99%. Phase 2 started when Dubai debts were declared and was sustained with Greece’s demise. Hopefully we are really in phase 3 now and get ready for more profits!