Take a look at this chart dating back to 1996. The chart represents the futures contract equivalent of the Dow Jones 500. First of all, look at the two tops which occurred in 2000 and 2007. This is what traders call a “classic double top.”
Next look at the channel line which starts in 2003 and moves at an angle from left to right. Notice how that uptrend line was violated in 2008, officially beginning a bear market in stocks. Since that time, the move lower in stocks has been like falling off a cliff.
Next point of interest is the bottom formed in 2002 (768) and the re-visited in 2009 (741). The would have been the “classic bottom” except for the fact that the market blew right through it( now trading at 675). Most traders expected that level to hold but oftentimes, what a market fails to do is as important as what is should do. The inability of the market to rally, despite the massive oversold conditions, is a clear sign of weakness.
Let’s take a moment to define oversold. Look at the oscillator labeled SStoch. The higher the number, the more overbought, the lower the number the more oversold. Notice how the market was very oversold in 2002/2003. From this point, a significant rally occurred. We have now matched those low reading (oversold) and yet nothing close to a rally has developed. To this point, no overtly bullish behavior has occurred. Of the 9 buying tests (another day’s column) that should be passed before a new long commitment (buying stocks) is made, none have been completed.
One more thought, bear markets almost always surprise in the direction of the trend (continuing selling). Three ways to attack the bear:
- get out of the market until the trend is truly bullish.
- Use any bear market rally, which could be as much as 20% to 30% to get out or lighten up on your stocks.
- Hang in there and continue to add to your position as the half off sale continues (only if you have a long term horizon).
Overall, you can see that we are talking about 2 or 3 years of repair work ahead of us. This is intended to be educational and not the views of Prime Lending or Plains Capital Bank. Please consult a professional or your psychic for further advice!