Context Is the First Principle
A buy signal is not bullish, a sell signal is not bearish, and the ten-stage sentiment cycle decides what each one means.
A buy signal is not bullish. A sell signal is not bearish. Each one means whatever the market's emotional cycle says it means at that moment. That is the first principle of technical analysis, and it is the one most traders never learn. Context determines the meaning of every signal you act on, no matter which strategy generated it.
Markets move through a repeatable cycle of human behavior, the same bell curve that describes how a new product spreads from early adopters to laggards. From the low of a bear market to the top of the bull and back again, sentiment passes through ten stages:
- Aversion and disregard at the bottom, where the public swears off stocks forever.
- Cynicism and doubt as prices climb out of the hole.
- Cautious optimism, where mistrust lingers and bulls stay scarce.
- Confidence, as the everyday investor finally catches up to price.
- Overt enthusiasm, the irrational exuberance stage.
- Greed, and the conviction that easy money is here to stay.
- Indifference after the top, where dips are bought on reflex.
- Dismissal, as prices slip below long-term averages.
- Denial, the insistence that the market cannot fall any further.
- Fear, panic, and capitulation, where the asset is thrown away at any price.
The tell for each stage is not price alone. It is how the news media frames events and how the public reacts to them. When the market rises on good news, ignores bad news, and then falls for no visible reason, you are late in the bull. Read that background behavior first, and the same buy signal that looked reckless at the top becomes a gift at the low.
Get the context right and the correct strategy selects itself. Get it wrong, and even a sound system will fight you the whole way down.
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