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Bear Market Rally
by Carl Swenlin
March 27, 2009
At the end of last week the market had made impressive progress through a strong zone of resistance, but it had become extremely overbought on a short-term basis. My conclusion was that we should at least get a short-term correction, since we are in a bear market. Instead, short-term indicators backed off while the market continued higher. This is bullish behavior -- the kind of thing you will see time after time in a bull market. That does not mean we are now in a bull market, but it does imply that the current price advance (now about +25%) may not be over. During bear market rallies, the market can persist in positive behavior, so that many people think a new bull market has begun. But eventually, the bear reasserts and the down trend resumes.
On the chart we can see that there is a short-term line of resistance just above current price levels. Even if the rally is destined to continue, it is likely that we will experience a short-term pull-back as the market prepares to break through the resistance.
I don't mention nominal cycles much any more because they can muddy the water, but based upon my cycle count, a 20-Week Cycle low is due in a week or so. A possible scenario is that, after a short correction/retest, a new 20-Week Cycle could launch the second half of the current rally. My upside target would be about 1,000 on the S&P 500.
Our mechanical Thrust/Trend Model (T/TM) for the S&P 500 switched to a buy signal on 3/17/2009, and virtually all index and sectors we track have also switched to buy signals. All these new T/TM buy signals are in short-term mode at this time. They were triggered when the Price Momentum Oscillator (PMO) and Percent Buy Index (PBI) crossed up through their moving averages. We are now waiting for the 20-EMA to cross up through the 50-EMA, which will confirm the short-term signal and make whipsaw less likely.
Bottom Line: The market recovered from a severe breakdown in prices, something I did not think it could do. This is evidence that possibly a new bullish phase has begun, but, in my opinion, it is a bull phase of an ongoing secular bear market. The rally can be played on a short-term basis, with the idea that we are riding a bear, not a bull.
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MAIL
Hi Carl,
I normally don't chime in and I am long at the moment (so take it for what its worth) but I think you need to keep an open mind re a bottom. True we were or are in a bear and the easy analysis is to just keep calling it a bear, but if you think about what a bottom would look like in this environment it would look like exactly what we're seeing. Mostly a bottom would show inordinately high indicator readings to the upside...in this case the second highest readings ever. I personally wouldn't buy until a pullback but that's what you're calling for here...and I agree and we got it with perhaps more to come. Just ask yourself that if you were looking at your indicators what would they register (look like) on a rally off a bottom. I think we're here. (Written 3/20/2009)
ANSWER: You are right that these are the kinds of readings we will get at a bottom; however, in a bear market, there is about an 80% chance that bullish readings will be wrong, so be careful. Our mechanical models will pull us in long before we actually know that a new bull market has begun. For us, it will be a bear market until the 50-EMA crosses up through the 200-EMA. at that time we will start shading our analysis and conclusions with a bullish bias.
Carl
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
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#17 Intermediate-Term Stocks (52-Weeks) (TD Index 111.9 Vs. SPX 61.51)
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#5 Bond Timer (TD Index: 105.85 Bonds 104.39)
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Beginning in 2006 we began using mechanical models -- the Trend Model for Bonds, Gold, and Long-Term Stocks, and the Thrust/Trend Model for Intermediate-Term Stocks. Prior to 2006 we used discretionary signals.
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BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
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