Stock markets are not always rational. Despite warnings to the contrary, of bubbles or over-heated valuation, investors often pile into a sector when it is flying, ever hopeful that the bull run has much further to go.
A market is said to be bull market when it is rising. Those traders who say it will continue to rise are described as bulls. Those who believe the market will fall are called Bears and a falling market is a bear market.
In some instances, the bulls may be right. Charts and historic high points can be proved wrong as the market confounds traditional thinking. Take the gold price, back in 2009 City watchers were warning that the market was getting a little hot when the price broke through the $1,000 per ounce barrier and yet the metal continued to trade strongly before making all-time highs in 2011 of nearly $2,000 per ounce.
Undoubtedly there was a stampede into gold back in 2009 and those who timed their entry point well – possibly on the back of post-recession inflation and dollar weakness – will have seen good returns.
It’s a question of timing
Being bullish is all very well but if you went into gold at the tail end of summer 2011 you would have got little if any of the upside and felt the impact of a sharp correction in the Autumn when the price fell to $1,628 with further falls in subsequent years.
For most investors the onus is on identifying sentiment changes early which means entry and exit points are more focused and informed rather than knee-jerk reactions.
In strong trending markets, bull powers are normally positive and bear powers are negative. But when there’s a shift, that is bull powers turning negative and the bear powers turning positive, it signals a move to the downside in the markets.
The Bulls and Bears power indicator can point to emotional extremes of both bulls and bears. These extremes (either hugely positive or profoundly negative) are often short lived and unsustainable.
Basically, the EMA measures the market’s consensus on value and the High represents the maximum bullish power in the bar/candle. The height of the Bull Power histogram shows the spread between the high in price and the exponential moving average (EMA). The taller the histogram rises the greater the maximum bullish power. If the entire price bar falls below the EMA then the histogram will fall below zero.
The equation to establish bulls power is:
Bull Power = High − EMA (exponential moving average)
Where High is the highest (maximum) price in a certain period of time.