A Simplified Model for Bubbles.

holeyprofit Updated   
ICEUS_DLY:CC1!   Cocoa Futures
This post is to test a hypothesis we can break bubble moves down into five main stages and with these we can have a reasonable idea where we might be in that move.

Here I've marked up the phases on Cocoa and I'll also show some others that have similar phases.

Broadly understanding the phases of a bubble and crash is not as grandiose a claim as it's made out to be. My idea that bubbles and pops can be understood is based on my opinion that various TA methods do a good job of explaining trend development. When major bubbles and pops of the are viewed in hindsight, they have obvious finger prints of bull/bear trend development.

Trend development models and theories are something we can develop and test trading over smaller timeframes. On 5 minute charts little bubbles and crashes happened daily. On hourly charts they happen weekly. Daily charts you see them over months. If you can test thing to work on these timeframes, it's perfectly valid to scale that to weekly/monthly.

My premise is the overall rules of trend development are not significantly different from the rules of intraday/week/month development.

Through the last years I've tested models I have for bull trend reversals with varying effects. I could tout various instances of forecasting major reversals in 2021/2022 and show a very timely switch to bull in 2023. The models have had many successes. They've also had many misses. I've learned a lot about the limitations of various things.

This is an attempt to combine the original trend development ideas I had with real experience of attempting to establish the major swings in moves over the last years and apply that to some current charts that have people's attention. Charts that as per this bubble template would be in heading into the reversal swings.

First let's expand on the five stages;

Stage one:

During stage one there will be an obvious uptrend. The trend won't be of an exceptional angel but it will be progressively heading higher. It will probably look like it's going up quickly in real time, but when viewed later this was a very slow section of the trend. Lots of pullbacks likely in this phase.

Stage one has an uptrend but it does not have a lot of people believing in it. In fact, what's most common is stage one is people pointing out the reasons the trend is unsustainable.

Stage two:

Stage 2 is a crash section of the move. The bull trend breaks. At this time there are not a lot of calls for dip buying, a more popular tone is "Told you so". People have been expecting the rally to fail and are vindicated. During this time is the best possible time to buy but it'd be a highly unpopular opinion to defend in the public arena.

Stage three:

The doubling. A magnificent trend. It defies doubters time and time again until few people dare to doubt and those who do are subject of mockery. There's been a full shift from those being bullish being the outcasts to those being bearish being the outcasts. By this time the asset in question should be the darling of market related forums.

Note - I've called this the doubling phase but it can be a bit more/less. What's important is it a massive advance of the trend. Which massively changes sentiment.

Stage 4

Stage 4 is a false reversal. Heading into stage 4 it's unpopular to be a bear. Usually by this stage we're seeing people buying the asset with no previous investing background (Or nothing of a speculative nature like this). It not only has public acceptance but it's shrouded in eternal optimism.

Note: It is possible the optimism around the asset in question is long term valid. This does not remove the risk of 70 - 90% drawdowns. A standard part of trend development is to make a first trend leg. Correct almost all of that trend leg. Then head into a far larger and longer trend. An example would be the 1920's rally and crash. Was going higher, late 20's was bad time to buy.

Stage 5

In stage 5 bulls become geniuses and bears become stupid. Stage 5 is where an unshakable belief in the trend is formed by bulls and even the most staunch of bears is having trouble shorting it. If they're not shy about when they're short, they do not have money to short any more. Stage 5 is a tough time to be a bear.

Stage 5 is a really strong spike out. Coming off the stage 4 bear trap it really solidifies the idea this trend can overcome anything. It is the strongest section of the trend. Brief, but aggressive.


Maybe the the most loved/hated stock in the world. Lot of strong opinions on NVDA. I personally think AI is cool and AI stocks have a great future. But remember that thing I said about big corrections. Just because something will be awesome in 30 years does not make it a good buy now (Looking at you, Nasdaq 1999!).

Here's the stages.


SMCI is tricky because when you look at the rally close up you can see there are 10% drops which could be considered fitting for stage 4. That would imply a top being in now we have the big break candle. However, it's also equally valid to make a case for this being stage 4 and there to be a final spike out.

The model would have SMCI either at a classic bull trap reversal level or due to spike the high before the real turn.

Click below for the case for high being in.


Here's the phases in AAPL looking at from inception.

The usefulness of the model (So far) for AAPL can be supported with an accurate forecast of the rally to a new high forming.

All of which would be well explained with Elliot Wave theory.

Here's an example of what happens when all of these phases hit and there is a strong and complete reversal.

SMCI and NVDA likely completed stage 5 if this model is working.
More stuff on the possible AI rug pull setup.
Update on Cocoa. A general principle of tops is there will first be a false reversal and then a head fake of it, usually ending 1.61 - 2.20.

This head fake zone is the optimal short zone with stops over the 2.20. 2.20 breaking usually signals failure of the head fake move and disproves the hypothesis of a high forming.

So if this is working we should be close to the top in cocoa here.
-30% on SMCI

Could be the first break swing.


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