1. THE MARKET TENDS TO RETURN TO THE TIME AVERAGE


Interpretation: Trends can be over-extended in one direction or another, but they will return to their long-term average. Even during a sharp uptrend or a strong downtrend, the price often moves back (reverted) back to the long-term moving average. The chart above shows the S&P 500 over a 15-year period with the 52-week exponential moving average (EMA52). The blue arrows show reversals to these moving averages in both uptrends and downtrends. The lower PPO (1.52,1) also showed reversals back to the 0 lines.


2. A TRADING IN ONE DIRECTION WILL LEAD TO THE REVERSE IN THE OTHER.


Interpretation: Markets that skyrocket in an uptrend will also drop sharply in a downtrend. Like a pendulum, the more it deflected to one side, the stronger it bounced off the other side at the same speed. The chart above shows the 1999 Nasdaq Bubble with the PPO Indicator (1.52.1) moving above the 40% level. This means that the Nasdaq is 40% higher than the 52-week moving average and has fallen into the zone of transition. This transition gave way to another similar one as the Nasdaq plunged in 2000-2001 and the PPO (1.52.1) indicator moved below -40%.


3. THERE IS NO NEW-ERA-MADNESS HAS ALWAYS EXISTED:


Interpretation: There will be a group of hot stocks every few years, but it does not last forever. In fact, over the past 100 years, we have seen a lot of speculative bubbles involving many different stock groups. Cars, radio, and electricity in the 20s. Nifty-50 in the early 70s. Biotechnology 10 years later and the dot-com bubble in the late 90s. "This will be different" is perhaps the most dangerous term in investing. As Jesse Livermore put it: "One lesson I learned early on is that there is nothing new on Wall Street. Anything that happened in the stock market today happened before and will happen much more. Again."


4. EXPONENTIALLY RAPIDLY RISING OR FALLING MARKETS TEND TO GO FURTHER THAN YOU MIGHT THINK, AND THEY OFTEN DO NOT ADJUST BY SIDEWAYS.


Interpretation: Although a group of hot stocks will eventually return to the average, a strong trend can last for a long time. The chart above shows the Shanghai Composite Index ($ SSEC) rising from July 2005 to October 2007. It was "overbought" in July 2006, early 2007, and mid-2007, but these levels do not mark a top as the trend expands with a parabolic state.


5. RETAIL INVESTORS OFTEN BUY THE MOST AT THE TOP AND LEAST AT THE BOTTOM.

Interpretation: Retail individual investors often view "bullish" at the top of the market and "bearish" view at the bottom of the market - according to a survey from the American Association of Individual Investors.


6. FEAR AND GREED ARE STRONGER THAN LONG-TERM INVESTMENTS.


Interpretation: Don't let emotions obscure your decisions or influence your long-term planning. Plan your trade and trade it. Prepare for different situations so that you won't be surprised by adverse price movements. A sharp drop in accounts and losing trades can increase the fear factor, leading to panic decisions. Likewise, favorable deals and outperformed returns can lead to overconfidence and deviation from long-term planning. You would be a much better trader or investor if you could keep your mind in a blank state. When your emotions rise, take a break, take a step back, and analyze the situation from a further distance.


7. MARKETS ARE STRONGEST WHEN THEY EXPAND AND WEAKEST WHEN THEY CONTRACT


Interpretation: The market breadth indicators are extremely important. A bullish wave above a narrow range indicates limited engagement and their likelihood of failure will be above average. The market cannot continue to rise if there are only a few large-cap (generals) leading. Small and medium caps (soldiers) must also participate to create confidence in the trend. Wave surges with the full participation of both "troops" and "generals" show a far-reaching power and increase the chances of achieving expansion.


8. A BEAR MARKET HAS 3 PHASES: STRONG BEAR, REFLECTIVE RECOVERY AND A PROLONGED BASIC BEAR TREND


Interpretation: Bear markets often begin with a sharp, rapid decline. After this decline, the market will have a rally when it goes into oversold conditions, which will retrace part of the previous decline. The ensuing slump continued, but at a slower and more intense rate as corporate (or asset) fundamentals deteriorated. The Dow Theory suggests that the bear market consists of three falling legs with "reflective" rallies in between.


9. WHEN ALL EXPERTS AND FORECASTERS AGREE IN UNISON-SOMETHING ELSE WILL HAPPEN

Interpretation: Excessive optimism from newsletters and analysts should be seen as a red flag. Investors should consider buying when stocks are not popular and the fundamental news is bad. On the contrary, investors should consider selling when stocks are the topic of discussion for everyone and all the news is good news. Such a contradictory investment strategy is often a reward for patient investors.


10. A BULL MARKET IS USUALLY MORE ACTIVE THAN A BEAR MARKET.

Interpretation: Wall Street is better suited to a bull market than a bear market.


CONCLUSION

Like all other rules, Bob Farrell's 10 rules don't need to be done in a rigid and mechanical way.