…we may have entered a bear market …

from Carl Swenlin | February 09, 2018 at 06:37 PM … stockcharts.com


It is, of course, too early to have long-term technical confirmation of a bear market, but it is not too early to anticipate that bearish outcomes will be a lot more likely than we have seen in the prior two years. The last two weeks have provided plenty of evidence in this regard.

Daily Chart:
…the correction has brought price all the way back to the cyclical bull market rising trend line. Assuming that we have a short-term bottom in place, I’m thinking of two possible scenarios (although there many, many more possible):
(1) One scenario is that the market will rally off a “V” bottom, trying to reach previous highs. But people will be selling into that rally, and it will fail before making new highs. The time frame for making the top is a few weeks.
(2) A better outcome would be a “W” bottom where the market rallies modestly, then rolls over for a successful retest of today’s lows. It would be best for this process to take place over, say, four to six weeks, and maybe the excesses get worked out and the bull market resumes.

Weekly Chart: This chart provides a good example of how trend line angles can differ in different time frames. While trend line support shows on the daily chart, we can see that the trend line was violated in the weekly time frame. The weekly PMO is bearish, having topped at very overbought levels.

Short-Term Market Indicators: At -400 these indicators look very oversold, but the bottom of their range long-term is around -600.

Intermediate-Term Market Indicators: They have reached bull market oversold levels. If we’re in a bear market, I expect these indicators go much lower.

Conclusion: I could be wrong about us being in a bear market, but that is not important because I’m prepared to change my mind as the evidence appears. What is important is that we should consider applying some bearish bias to our analysis — start approaching the market with the assumption that bear market rules now apply. Yes, our Models are on BUY signals, but they are wind socks. They are mechanical. So, while the wind socks show wind that is steady and straight down the runway, our brains can observe thunder storms near the airport, and can be aware that the wind may soon become dangerously gusty and variable.
Today the market found support on a long-term trend line and the 200EMA, and it appears that the selloff has abated for now. Our short-term indicators are very oversold and support the idea of a short-term bounce; however, intermediate-term indicators are not oversold enough to make me think this leg down is completed.