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The Four Stages of Sticker Shock
To develop a deeper level of understanding of the negotiation process； let's。talk。about the underlying psychology that drives。the auction。 As。the great trader Jesse Livermore once said； 〃I absolutely believe that price movement patterns。are repeated and appear over and over with slight variations。 This。is。because humans drive the stocks。and human nature never changes。〃
As。it builds。the bell curve； the auction process。tracks。the psychology of the negotiation process。in four stages。 With a nod to Elisabeth Kübler…Ross； I call it the four stages。of sticker shock。
1。
In stage one （shock。denial）； a dramatic。directional move beyond the well…accepted value area is。halted by a feeling of “sticker shock” on the part of participants。 The new price point stirs。feelings。of “I can’t believe it； this。won't last〃
2。
In stage two （anger）； usage slows down as。people search for alternatives。or attempt to change long…standing patterns of behavior； triggering a counter…move that seeks。an opposite end of value。 In this。stage the extremes。of a trading range are first established。 Normally the market retraces。a portion of the initial dramatic。directional range。 The feeling here is。〃I won't buy/sell it。 I’ll take my money/product elsewhere”。
3。
Stage three （bargaining） ushers。in the beginning of development； which explores value and buildsnsensus to determine what is acceptable and unacceptable within the range established in stage two。 During this。phase； participants。grow used to the price as。
shock。and anger wear off。 （This。phase usually creates。either a lowercase b…shape or an uppercase P…shape profile。） “I’ll just use/sell what I need to get by。〃
4。
After a brief or protracted period of bargaining； stage four （acceptance or rejection） unfolds。in one of two ways：
。
Acceptance。 This。represents。resignation to the new level of prices and acceptance that it is。fair。 The market breaths a sigh that says。 〃This。is。the new standard。〃 At this point； the initial imbalance revives。and the cycle begins。anew。
。
Rejection。 The market ultimately rejects。the new price and returns to where the move originated。
Let’s。look。at the fourth stage and the transition to a new cycle in more detail。 If the market truly accepts the new price level； it will continue in the direction of the initial dramatic move to stake out a further price territory。 Figure 9。7 shows。
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the narrow tail of the P or b shape。 This。creates。a large bell tune； ultimately resembling a capital D。
Application to Spreads
Let's。look。at an example of this。negotiation process。as applied to a spread market。
Figure 9。9 is。a chart of the 2…year Euro Schatz versus。the 5…year Euro Bobl spread for the period July 25 through August 1； 2006； organized into the Market Profile formal。 ing out of the mode （widest area） of a well…developed bell curve （D shape）； the new auction process。starts。with an initiating directional move。 Here； it's。a sell…off that opens new territory。to the downside。
As。the negotiation （auction） begins； the first stage shuts off the selling； and then the later stages。start to build volume toward the bottom of the dramatic。directional move； forming the lowercase b…shape （Figure 9。10）。
Once the b…shape isplete； the market is。ready for either price acceptance （a further move in the same direction） or price rejection （a return to the starting point of the decline）。 In this。case； the market followed a price…rejection scenario； which resulted in a rally。out of the high…volume level of the b back。toward its。initiation point。 The ultimate result was the creation of a D…shape bell curve。
Let's。put these profiles。together； as。shown in Figure 9。12。 On this posite profile； the 2…year Euro Schatz versus。the 5…year Euro Bobl spread is。showing a D shape that is。close to pletion of a fully developed bell curve。 As。often happens； the shape is。not a perfect bell curve。 It is。rather wide and has。a dent of low volume around 9847； between two pleted bell curves。 A market will sometimes。fill。in this。type of low…volume area； but in this。case the width of the profile suggests。that the market is。very。near a new directional move。 By putting this。smaller bell curve into a larger context of development； we can determine the next directional move out of the high volume area of 9855。
In general； as a building bell curve nearspletion； the trading strategy is。to position oneself at one end of the developing value area in anticipation of the
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case； we see a large underdeveloped area below the market and would begin to anticipate a new directional move to the downside。
Figure 9。14 shows。the subsequent market action。 The market did in fact follow our expected scenario and begin to build volume in the formerly underdeveloped area。 In the next section； we consider this。in light of the four elements。of a trading strategy。
Finding a Larger Context
The idea of a larger context is。critical to using Market Profile effectively。 Recall our four elements of a trading strategy： determining market direction； establishing a target； knowing how much time you have in a trade； and recognizing whether you're right or wrong。 We now have tools。to support each of these trading decisions。 We'll illustrate this。process。with the 10…year U。S。 Treasury notes。versus。10…year EuroGerman Bund spread； using a ratio of 100 to 55。
Using the profiles。in their default organization （by days） is。not the best way。to track。the progress。of the negotiation process。 I like to bine the profiles； as。we've been doing here； to bring out the bell curves。 But how do we know what to bine？ In an underdeveloped value area； the market can spend days。trading back。and forth within the established extremes。of value。 If the range is。established in one day； the market might spend three or four days。building volume in that range。 We typically bine profiles。that are building within the same value area until the bell curve es。close to pletion。 When the profile is。ripe and ready to spill directionally； we start to put the nearly developed curve into a context。
We'll illustrate this。with an example。 In Figure 9。15； on August 23； the market established a fairly broad range； but one day was。not enough time to fully explore the range or build consensus。within that value area。 For two consecutive days； tradersuld have taken advantage of that underdeveloped profile in the low…volatility environment of development。 The strategy； then； for August 24 and 25； was。to sell the top of value and buy。the bottom of value。 We thus。have a trade location for modest directional moves。within this。bracket。 This。strategy is。valid until the range fully develops。a bell curve。 The idea of range trading within the value area isnfirmed if you see horizontal price prints。（multiple prints at the same price） at the top and bottom of value； as。opposed to single upward prints。at the top or downward ones。at the bottom； which would mean the market was。no longer range trading； but initiating a new directional move。
To continue with this theme of trading a broad initial range until the bell curve is p