By Brian Shannon, written with Kyna Kosling (@KayKlingson).
First published on October 27, 2025.
Technical analysis isn’t a tool for measuring your emotions, but those of the market.
A common question I get is whether you should anchor a VWAP to your entry point—your own key event to which you yourself are anchored.
The answer is ‘no,’ because you’re the only person anchored to that price.
Your objective is to interpret the psychology of all participants collectively, so you can anticipate the market’s likely next move and position yourself accordingly.
That begins with understanding a stock’s lifecycle and the emotions shared at various stages of that cycle.
Psychology of the long holder at various stages of a stock’s lifecycle.
Note: For simplicity’s sake, this article focuses primarily on the emotions of the long holder. However, keep in mind that emotion cuts both ways: Stocks often have two sets of supply and demand, long and short.
Each stage within this cycle creates the conditions for the next, so the cycle endlessly repeats itself.
Let’s trace this emotional journey through a hypothetical (and realistic) example.
Imagine a beaten-down stock, which some fund managers didn’t sell on the way down, so they’re still holding a large position. However, like Peter Lynch said: “If they don’t scare you out, they’ll wear you out.”
In a fund manager’s case, they may feel anger or depression over all the sleepless nights, endless questions from investors, and maybe even taunts on social media. They’ve been sitting in the stock, but it’s only gone—and stayed—down.
Those losing fund managers are fed up with it, and have one thought only:
Get out of the stock so they can end their depression.
However, they also don’t want to depress the stock any further, so sell into every little ‘pop.’
This creates ‘overhead resistance’ for the stock (see image below), preventing it from breaking out.
Every rally is met with selling (overhead resistance), preventing the stock from breaking out.
But while the losing fund managers are preoccupied with getting the stock off their books, skilled fundamentalists are looking ahead and doing their research. Those researchers are the ‘smart money,’ uncovering the businesses with great potential.
These educated participants are looking for factors that’ll drive future revenue. They try to uncover little-known information that points to growing future earnings and sales. Perhaps the company is building an amazing new product, or it’s a major player in a growing industry. Or perhaps it’s a biotech conducting trials for a promising new drug.
The anticipated earnings growth motivates smart money to start accumulating shares from participants unloading their losing positions. They’re patiently building a large, long-term position without driving prices significantly higher.
(The limited market impact of this Stage 1 accumulation is partly due to the lack of event catalysts.)
Gradually, the stock starts showing signs of recovery, catching the attention of more participants.
The earnings that value investors are optimistic about aren’t there yet, but the latest quarter-over-quarter earnings are decelerating from -50%, to -40%, -20%, and -10%. Plus, future earnings are forecasting growth.
Fundamentally-driven investors are optimistic. And as the stock begins to build higher-lows, perhaps even some higher-highs, technical traders start taking an interest.
After an extended downtrend, this stock is starting to make higher-highs and higher-lows. Notice also the change in moving average behavior, with price now above the 20, 50, and 200 DMAs (blue, green, and dotted black respectively), and the 20 and 50 DMAs rising.
News stories like “stock XYZ was up 10% on high volume today, making a new 52-week high” may help bring further attention to the stock.
We have the beginning of a trend—even if many participants don’t trust it yet at this stage.
“We’ve seen this movie before,” they’ll say, without realizing they’re missing nuances like:
⚓️ Volume is expanding on price surges
⚓️ Price is above rising 50- and 200-day moving averages (DMAs)
⚓️Shallow pullbacks, telling you that shares are being accumulated
As disbelief turns into hope, sellers aren’t aggressive enough to push the price lower, while buyers keep stepping up with strong bids.
All clues point to the stock being more likely to push higher than to fall apart—and so the Stage 2 uptrend begins.
As optimism turns into belief, the story starts to change.
Perhaps the company announces that revenues have started to improve, even if those advances aren’t yet visible in the bottom line.
Management tells investors: “We’re still paying down debt, but production is ramping up and we expect to report our first profitable quarter soon.”
Then, the next earnings report delivers a positive surprise: Not just $0.03 per share, but $0.07 per share—more than double of expectations. The company may have even deliberately downplayed things to not overexcite investors, and because they knew the earnings beat would send its stock higher.
That earnings surprise turns optimism into conviction. More investors begin to believe the turnaround story is real, and as sentiment transforms, the uptrend continues.
Long participants get more confident, trend traders pile in, and even skeptics who once dismissed the stock start getting interested.
Fundamentals and technicals now reinforce each other: Improving numbers feed the narrative, while rising prices amplify confidence.
The stock roars on, potentially for several quarters. The more ‘stretched’ the stock gets, the greater the thrill among long holders as they’re bragging about their gains. That causes sidelined cash to chase the stock, driven by FOMO.
The more ‘vertical’ a stock moves, the higher the likelihood of a pullback. Always ask where the stock has come from!
With every dip that gets bought, confidence turns into overconfidence. “It’s going to the moon! There’s no way this thing is coming back.”
But the less opportunity the stock gets to digest its gains properly, the more extended it becomes.
The further the stock moves from its key moving averages (thus becoming extended), the more tempted short sellers are to get involved.
Maybe their short position works, and they catch a 20% move back down to the 20 DMA before covering, just as pullback buyers use the opportunity to get into the stock. That demand results in a powerful bounce, sending the stock to new highs.
The sloppier action is characteristic of Stage 3 distribution.
However, those short sellers also have every chance of getting run over—which is why you should never fight the trend—forcing them to cover at a loss. Simultaneously, people who sold too early (or never bought it to begin with) chase the stock higher.
Those combined sources of aggressive demand fuel a euphoric parabolic move.
That move turns out to be the blow-off top. As no one is left to buy, the stock pulls back.
Long holders think: “No big deal. It rallied so quickly after that last pullback. It’ll come back. They always do.”
However, rather than bouncing straight back up, the stock moves sideways for a while. Complacency sets in: “It’s a good company. Analysts are maintaining their buy rating and price targets. It’ll come back.”
But then the stock breaks down from that range—which is why you don’t take a position while it’s moving sideways. Following a range contraction, range expansion can happen in either direction.
Once the range was broken (which was also when price moved below all key moving averages), the stock continued to move lower.
Anxiety starts setting in. Participants start wondering: “What’s going on here? Why is the stock going down? It’s a great company!”
At that point, they might zoom out on the chart and say: “OK, the stock is going down for now, but the long-term trend is still intact while the stock remains above the 200 DMA. That’s a place we often find buyers. It’ll bounce there.”
However, the 200 DMA is only a level of interest—not guaranteed support (or resistance).
Even if price hadbounced, by this point, the shorter-term moving averages are declining. The stock is firmly in a Stage 4 downtrend. Anxiety turns into fear: “Wait, buyers are supposed to step in here. What’s going on?”
Still, long holders remain in denial. “The CEO said only this morning how revenue is still growing.” “This product isn’t going away. The internet is here to stay. AI is here to stay. The market is wrong—the stock has to come back.”
Next quarter, the company reports good earnings, but the stock continues to decline. “How can price be going down?! Earnings were great!”
True, but they were also already priced in.
The market is a discounting mechanism.
Revenue may well be growing, but the rate of growth has slowed down.
‘Smart money’ saw the writing on the wall months ago, have long taken their profits, and are already searching for the next undervalued opportunity that other people are overlooking.
Now, uneducated money aren’t just losing their paper profits, but also losing their principal. That’s when panic turns into capitulation. “This thing keeps dropping. You know what? I’m out. I can’t take this anymore.”
They sell into the weakness, speeding up the decline.
As the remaining emotional sellers ‘throw in the towel,’ the stock bottoms and bounces.
Those recent sellers may actually buy the stock again, then lose more money as it quickly hits resistance from all the overhead supply.
(‘Overhead supply’ is another term for overhead resistance, created by all the people who bought the stock higher and are now looking to get out at breakeven. Price has a memory!)
This is quickly followed by angry declarations like: “The stock market is a scam! I’m done. I’m closing my account.”
For those who doggedly won’t sell, depression awaits as the stock continues to move sideways (Stage 1 again), wondering: “What do I do now? It’s not even going up now!” And the more they watch the stock grind sideways, day after day, the more depression sets in.
Those depressed holders become the supply for the next generation of ‘smart money.’ The cycle restarts—as it always does.
Remember the 6 Pillars of Price Action:
1⃣ Only price pays™
2⃣ Price movement is purely a function of supply and demand
3⃣ The market is a discounting mechanism
4⃣ Price isn’t just the effect, but also the cause
5⃣ The only true constant in the market is human nature
6⃣ Markets possess fractal properties
Today’s article dug deeper into Pillar 5, but also links to the other Pillars. The ‘force’ behind the emotional cycle is human nature, but also reflects how the market is a discounting mechanism, and how price can be the cause—even if it’s also a function of supply and demand.
Furthermore, participants go through the same emotions, whether on a monthly, daily, or 1-minute chart, creating the fractal market structure. No matter their strategy or timeframe, every participant is anchored to their entry price, so the same (or similar) patterns appear on alltimeframes.
Finally, never forget that only price pays. Price doesn’t just tell the truth of supply and demand—it is your scorecard. Everything else comes after price, including the AVWAP, so make sure you understand the Pillars of Price Action!
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