Market psychology and how to trade in the present market

What drives market prices? There are many forces but the most potent one is the psychology of market participants. There are basically three participants - traders/investors/companies, middleman (investment banks/brokers/market makers) and government. Normally government always wins in the long run (over a 2-3 year period). But we are not living in a normal economic times and government's actions may not have the desired effect in a reasonable time. Furthermore, government's actions may lead to unintended consequences such as hyperinflation and currency devaluation. We cannot use government actions to trade short term except its news value on the traders. Now as far as the traders and middlemen are concerned, their behavior are easier to figure out from the market action. In the bull market the supply of shares is infinite since companies continue to issue shares to easily raise funds without any dilution since they seem to be getting more money for the new shares than they are worth. On the other hand, in the bear market the number of shares is finite and relatively constant. Large holders also tend to hold which makes the shares available to trade limited. This tells you that the bear market will be influenced by the demand of a product that is in short supply which no one wants at the moment. On the other hand a bull market is influenced by supply of easy money that can be used to support higher prices. That is why you ought to look at the volume of trades (=participants) in the bear market and the level of ease of credit in the bull market to sustain itself. During the bear market the short term run to the downside is always accompanied by exhaustion of people who wish to sell. Since the supply of shares is limited any lack of selling pressure is accompanied by a violent upside reaction. In a bear market end of a short term upside is readily spotted by the disappearance of people (i.e. demand) who will pay the current price. Bear market does not end until easy credit makes it possible to overpay for shares and still make profit. Bull market, on the other hand, does not end till government pulls the plug on easy credit. For last several years easy credit was made possible by foreign govts, especially china and japan, buying treasury which US govt was using to funnel into the credit market. Now it appears that chinese govt is becoming more careful with its money and there is significant realization on the part of chinese that their money may not be safe with uncle sam, it is quite possible that easy credit will not return soon. But my belief is that easy credit will return when the sky becomes clear again since american govt and public are addicted to easy credit until they make the american govt bankrupt. Thats a realy scary scenario whose probablity is better than 50%, i.e. it is more likely to happen than not. For now, since we will not see easy credit any time soon (less than 1 year) we should not expect a sustainable bull market. This does not mean there is no money to be made on the long side. Volatility can be exploited to make some money on both sides of the trade. Happy trading.