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BULL/BEAR MARKET


The Confused S&P 500

12/14/11 12:29:45 PM
by Alan R. Northam

There are times when a market or security is in a bullish trend and there are times when it is in a bearish trend. However, there are also times when a market or security is simply confused. This is one of those times.

Security:   .SPX
Position:   N/A

Figure 1 shows the Standard & Poor's 500 in the top panel, the BNB indicator in the next lower panel, the bob oscillator in the third panel, and the confusion indicator in the bottom panel. The BNB, bob, and confusion indicators are my indicators providing information about the condition of an index or security and I will explain each of them.

The BNB indicator looks much like that of the directional movement indicator (DMI) but is completely different. This indicator looks at each trading session and determines if it is a bullish session or a bearish session and plots a green line on the chart to represent the number of bullish trading sessions over a certain lookback period and a red line to represent the number of bearish trading sessions, hence the name BNB (as in "bull and bear"). The bullish indicator is constructed by totaling up the number of bullish sessions over a given lookback period and plotted on the chart. The bearish indicator is constructed in the same manner.

Figure 1 shows a plot of the BNB with a lookback period of 200 trading days. When the bullish indicator is above the 50% line, it indicates that more than 50% of the last 200 trading sessions were bullish, and when the green indicator is below the 50% line, it indicates that less than 50% of the last 200 trading sessions were bullish. As can be seen, this indicator moved below the 50% line in late July. The red indicator represents the number of bearish trading days over the last 200-day period. When this indicator is greater than the 50% line, it also indicates that more than 50% of the last 200 trading sessions were bearish, and when the red indicator is below the 50% line, it indicates that less than 50% of the last 200 trading sessions were bearish.

The bearish indicator line (red line) has remained below the 50% line, indicating that less than 50% of the last 200 trading sessions has been bearish. Now look at the trend of both the bullish and bearish indicators. Note that the bullish indicator has been moving in a downward direction, indicating that the number of bullish trading days over the last 200 trading sessions is in a downtrend. In addition, see that the bearish indicator (red line) has been moving upward, indicating that the number of bearish trading days is in an uptrend. This tells us that a change in trend from bullishness to bearishness in the S&P 500 is taking place.

Note that neither the bullish nor the bearish indicators is currently above the 50% line, indicating a lack of trend since early August 2011. Note that the bearish indicator has now moved above the bullish indicator, suggesting that a bearish trend is in the making. However, a new bearish trend is not confirmed until the bearish indicator moves above the 50% line.

FIGURE 1: .SPX, DAILY. This chart shows the daily price chart of the S&P 500 (.SPX) in the top panel along with the BNB, bob, and the confusion indicators in the lower panels. This figure shows the S&P 500 in a slow continuous shift from a bull market to a bear market.
Graphic provided by: MetaStock.
 
The bob indicator is an oscillator that moves above and below the zero line. When this indicator is bullish it moves above the zero line, and when it is bearish it moves below the zero line. Thus, this indicator bobs up and down above and below the zero line, thus its name, as it indicates when a market or security is bullish or bearish.

This indicator is constructed by subtracting the BNB bullish indicator from its bearish indicator and plots the difference. This indicator provides another view of the bullishness or bearishness of a market or security. From Figure 1 it can be seen that the bullishness of the S&P 500 peaked in May, became slightly less bullish during June and July, but then its bullishness starting falling off quickly in August through mid-November. This indicator also shows that the S&P 500 turned bearish in late November. Two downsloping trendlines have been added to the chart to highlight this decreasing bullishness.

This is certainly not the sign of a new emerging bull market but the slow continuous shift from a bull market to a bear market, as the average number of bearish trading sessions continues to increase and the average number of bullish sessions decrease.


The final indicator is called the confusion indicator. This indicator also looks at each trading session and determines if the trading session is a bullish session, a bearish session, or neither. When a trading session is neither bullish nor bearish, this indicator sums up the number of sessions over the lookback period and plots the average as a session of uncertainty. For example, over a given lookback period of 200 trading days, there might be 60 bullish trading sessions, 35 bearish sessions, and five sessions of uncertainty.

Here is where the confusion sets in. When the average of the number of bullish sessions is below 50% and the average of the number of bearish trading sessions is less than 50%, the indicator plots the uncertain trading sessions as periods of confusion. The rationale here is that since the average number of bullish and bearish sessions is less than 50%, neither the bulls nor the bears are in control, leaving the market or security in a state of confusion.

The indicator plots periods of confusion as red bars. Figure 1 shows that from August through the early part of December, neither the bulls nor the bears have been in control, leaving the S&P 500 in a state of confusion.

To relieve the S&P 500 from this state of confusion, either the BNB bullish indicator or the BNB bearish indicator needs to move above the 50% line.

The BNB indicator shows that the S&P 500 has a bearish bias but neither the bulls nor the bears are in control of this market. The BNB shows this bearish bias by its bearish indicator having moved above its bullish indicator, signaling that there has been more bearish trading days than bullish trading days over the past lookback period of 200 trading days. However, neither the bulls nor the bears are in control of this market, as neither the bullish or bearish indicator is above the 50% line.

The bob is at a disadvantage when it comes to showing bias, as it only shows if a market or security is bullish or bearish. However, the bob has an advantage in that this indicator makes it easier to see a trend in bullishness or bearishness. Thus, both the BNB and the bob indicators have their individual advantages and disadvantages and both indicators therefore complement each other.

The confusion indicator is different than the BNB and bob indicators as it doesn't show bullishness or bearishness, but instead shows when a market or security is in a state of confusion. This indicator shows that from August onward, the S&P 500 has been in a state of confusion, as neither the bulls nor the bears have been in control.

The S&P 500 currently has a negative bias but remains in a state of confusion, as neither the bulls nor the bears have yet regained control of this market.



Alan R. Northam

Alan Northam lives in the Dallas, Texas area and as an electronic engineer gave him an analytical mind from which he has developed a thorough knowledge of stock market technical analysis. His abilities to analyze the future direction of the stock market has allowed him to successfully trade of his own portfolio over the last 30 years. Mr. Northam is now retired and trading the stock market full time. You can reach him at inquiry@tradersclassroom.com or by visiting his website at http://www.tradersclassroom.com. You can also follow him on Twitter @TradersClassrm.

Garland, Tx
Website: www.tradersclassroom.com
E-mail address: inquiry@tradersclassroom.com

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