Trends - Pull Back or new Bear market? 6/9/2006
The recent
market fall has many worried.� Is it just a
pullback and the cyclical bull market will resume soon,
or is this a new cyclical bear market?� According
to many pundits, if the market pulls back 10-15% it is a
pull back.� If the market falls 20% or more then we
have entered a new Bear Market.� Well, let's look a
little more closely into this potential change in market
trends.
First, start with the
big picture as presented in
Market Cycles.� In summary, history shows us
that the stock market moves in long secular bull and
bear market trends lasting 15 - 20 years on average.�
Within these long trends there are shorter cyclical bull
and bear market trends that generally last 2-3 years.�
The last secular bull market began in 1982 and ended in
2000.� We then went into a cyclical bear market
from 2000 to early 2003.� Starting in early 2003 we
entered a cyclical bull market.� The question is
have we seen the end of this cyclical bull market and
are we now entering a cyclical bear market?
The following chart is a classic
example of a cyclical bear market starting in 1966 and
lasting till 1982.� Notice how it began at about
1000 and ended at about 800 while encountering several
good cyclical bull and bear markets.� Also, note in
1966 that the DJIA fell more than 25% touching 750,
before rebounding to over 900.� So, here is one
example where the pundits were right.� Also, notice
that is is very important to stay on the right side of
the cyclical trend to make money.
The following chart is of the weekly
S&P 500 for the last 7 years indicating the cyclical
bull and bear phases of market.� The 65 week moving
average acts as support during the bull phases and as
resistance during the bear phases.� As of Friday
June 9, 2006 the S&P 500 is touching this important
indicator.� The 23 week Relative Strength Indicator
(RSI) stays above 50 during bull phases and below 50
during bear phases.� It looks like we will have a
much better indication of whether we are entering a new
cyclical bear market.� However, I suspect we are
entering a new cyclical bear market, but we shall see
soon.
This next chart shows that the Nasdaq
is nearing a key support level near 2100.� When
combined with the Stochastic and Ultimate indicators it
gives us another picture to consider.� First, the
support level near 2100 needs to hold over the next week
or so for the up trend to continue.� Notice that
whenever the Stochastic falls through 20 the Nasdaq
rebounds.� However, it is more difficult to say the
same for the Ultimate indicator.� What this tells
us is that we may see further weakening or we may see a
rebound.� We will know more in the next couple of
weeks.�
Unfortunately, that is the nature of
technical analysis.� Sometime you must wait to see
what happens.� Making a decision before you have
better information, like entering buys, often causes one
to enter a loosing trade.� It is still time to be
cautious on both the long and the short side.� I am
waiting until I get a better indication of the cyclical
trend.� As a result, I am not buying and I am
adjusting my stops on a more frequent basis for all
outstanding long and short positions.� � |
