“History doesn't repeat itself, but it often rhymes.”

In an attempt to not be pure exit liquidity this cycle let's attempt to decipher the following:

The Boom-Bust Sequence & The Comparison of Narrative Momentum & Price (in particular, Narrative Cycle Tops).

Alright, let me preface this by saying I'm not a macro expert by any sense of the word.

However, you don't need to want to be a macro expert to be interested in how cycles work (they also occur on smaller time frames).

This discussion or aspects of it can actually be applied to a wide variety of assets from pure shitcoins to $BTC.

While reading through George Soros's "Alchemy of Finance" and Brent Donnelly's "Alpha Trader" (in particular, the narrative section),
I was struck by several AHA moments.

I would like to try to recreate the same for you.

At a minimum, by the end of this thread you should have some understanding of the following terms:

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Reflexivity
Boom-Bust Sequences
Narrative Cycles
Lag associated w/ Narrative & Price

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Let's walk through it together.

Let's start with Reflexivity.

You can think of reflexivity as a feedback loop.

It stems from social theory and George Soros brought it into the world of finance.
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An analogy:

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Pavlov's Experiment & Conditioning

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To make a long story short, Pavlov set up an experiment where he rang a bell before giving food to his dogs.

Initially, the dogs didn't give much of a shit when the bell was rung.

With time, the ringing of the bell elicited a response in the dogs and they would salivate at the ringing of the bell (in anticipation of the food).

We'll come back to how this concept fits into The Boom-Bust Sequence.

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Now for Narratives.‍

‍Quoting Alpha Trader (Brent Donnelly):
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The narrative is the story the market tells itself to explain movements in price.‍

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i.e.

Understanding narratives goes hand in hand with deciphering the story that the market is painting as well as the story that the participants in the market are telling themselves.

A few interesting points here:

↦ There can be nested narratives for a macro narrative e.g. perhaps the uptrend into the ETF news can be looked at as a nested narrative in the overall cycle.

↦ The underlying story being told typically shifts in the other direction before price does.
Hence, the lag.

↦ Price has a tendency to overshoot the narrative (in one direction or the other) due to fear and greed.

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The Boom Bust Sequence‍

There's a section in the Alchemy of Finance named "Reflexivity in the Stock Market" which discusses "boom and bust sequences".

↦ An elementary model of the sequence starts with an underlying trend that is not yet recognized.
When the trend is recognized by participants it leads to the beginning of a "self-reinforcing process".

This can also be looked at as the narrative/the story being told has shifted in a positive trajectory long before the price decides to catch up.

The stronger the "self-reinforcing" process becomes the strong the "reflexive relationship" becomes.
‍Think back to Pavlov's dogs.

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i.e.

Initially, during the recent months of the strong uptrend, people were hesitant to "buy the dips".

Over time, more and more participants become complacent in terms of "buying the dips" until it becomes "let me crank up the leverage and long this dip because it's free money".

Market participants are willing and more confident to take on more one-directional risk while the gap between the narrative momentum and the price is rapidly closing (and eventually diverging).

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↦ As this self-reinforcing process continues, the underlying trend and the prevailing bias become "increasingly vulnerable".

When the trend in price can't compete with the prevailing expectations, a correction occurs.

I believe this aspect aligns with a stage that is referred to as "First Cracks". (as mentioned in the book, Alpha Trader).

This is when the "story gets overcrowded" i.e. early participants of the trend take profit and late participants get shaken out. 

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BTC & Potential "First Cracks" Phase?

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So, how can this be applied in a practical framework?

My smol brain believes the "first cracks" phase is where we potentially may be sitting currently.

On a HTF, once the first significant correction on $BTC is successfully defended, we're in for the party continuing.

Currently, BTC is ~17% down from the local high.

Typically, bull market pull-backs are in the 20-30% area. But it would be naive to take that as a hard and fast number.

Whether we get a deeper pull-back from here or not, an observation that can be made on HTF is that there is a significant amount of space underneath to revisit while the HTF uptrend remains intact.

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Continuation of the Boom-Bust Sequence

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↦ "A self-reinforcing process undergoes orderly corrections in the early stages, and, if it survives them, the bias tends to be reinforced, and is less easily shaken.

When the process is advanced, corrections become scarcer, and the danger of a climactic reversal greater." (Alchemy of Finance)

The first significant correction is noted to be followed by a hype wave (new highs) and the eventual "peak and turn" (as noted in Alpha Trader).

This would go hand-in-hand with the continuation of the uptrend and eventual peak euphoria/blow-off top.

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‍Narrative Cycle Top - Lag between Narrative Cycle & Price

"Excellent traders will realize there has been a meaningful turn in the narrative here, even when price continues to make new highs....

As long as price continues to rise, most traders will ignore information that goes against the narrative."

Essentially, when a narrative cycle begins (trending upwards from the bottom), fair value is lagging behind. This is when assets are at a discount.

This is followed by a "catch-up" phase and then comes the eventual peak, when the price is hyper-inflated compared to the underlying story (leading to the bust).

One can draw the conclusion that the lag at the top (underlying story has already shifted direction compared to price which stays going up) occurs in part due to the greed of market participants.

This lag also seems to occur at "the bottom" or during meaningful pullbacks over the course of a cycle in the inverse direction due to fear.

Understand the stories the market is telling itself and learn to identify when the market is falling in or out of love with a narrative. (Alpha Trader).

This is a lot easier said than done.

The goal here (atleast for myself) isn't to pretend that we can make accurate long-term predictions or that we're savants but more so to be mindful of and try to grasp the behavioral aspect of cycles (specifically reflexivity).

Some practical tips provided in Alpha Trader to become better at deciphering the story of the market:

↦ Read like a fiend with a focus on quality.
↦ Develop a network.
↦ Find the subject matter experts.
↦ Study potential drivers and catalysts. (this is my addition).

I'm still working on this aspect and I believe there is no shortcut to this besides getting in the mud and being observingly present over multiple cycles (along with the points mentioned).

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Additionally, another aspect that I might dig into is, 2nd order derivative data.

‍i.e. looking at the rate of change of a trend rather than the absolute number change in a trend.

While far from becoming or pretending to become macro experts, I hope this writeup provides you with an elementary understanding of reflexivity, boom-bust sequences, and narrative cycles. (these also occur on smaller time frames i.e. cycles within cycles)

So now, when you see these words being used you'll have some understanding of what they mean.

I would highly recommend you take some time and read through the Alchemy of Finance and Alpha Trader if you're interested in reading more on these subjects.

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