CHART ANALYSIS

Was That A Bear Market?

09/02/11 09:04:06 AM

by Mike Carr, CMT

Almost every stock decline of 5% leads to the question about whether a new bear market is under way. The steep drop in August prompts that question once again.

Security: SPY
Position: Buy

Stocks fell more than 19% from their highs, using the Standard & Poor's 500 as the benchmark (Figure 1). The high was reached in May. That's close, but some purists insist that it takes a 20% decline for a bear market. For them, this wasn't a bear market, although many investors seem to have become permanently bearish and are always assuming that a big decline is just around the corner.

FIGURE 1: SPX, DAILY. The S&P 500 rate of change indicator looks bullish as prices rebound from their recent sharp decline.

Graphic provided by: Trade Navigator.

From a longer-term perspective (Figure 2), the monthly chart shows that the recent down move in the S&P 500 was simply a Fibonacci retracement, and the decline stopped near the 38.2% level. This would be considered healthy for a bull market.

FIGURE 2: SPX, MONTHLY. The ROC is now close to a neutral reading after becoming extremely overbought on the monthly chart of the S&P 500. This indicator is now supportive of a bullish move in the S&P 500.

Graphic provided by: Trade Navigator.

Ned Davis Research defines a bear market as a 30% drop in the Dow Jones Industrial Average (DJIA) over the course of 50 days, or a 13% decline in the average after 145 days. By that measure, the most recent decline also fails to be classified as a bear market.

With momentum supporting further price strength, it seems like the August swoon in stocks was a retracement in an ongoing bull market.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."


Website:	www.moneynews.com/blogs/MichaelCarr/id-73
E-mail address:	marketstrategist@gmail.com

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CHART ANALYSIS

Was That A Bear Market?

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