Well, today was interesting, wasn’t it? Some traders are wondering if the bear market has begun. I think that it is important to quantify what a bear market is so we can answer this question. Technically, a bear market is after the market has corrected by 20%. By using technical analysis, we can come up with some other definitions. Take a look at the chart below. This is a chart of the monthly S&P Index, the SPY.
This is the chart I use to determine if the market is bullish or bearish. I use the 20 period moving average. It does not catch the tops and the bottoms but it does keep me on the right side of the trend the majority of the time. The chart is easy to use: If the last completed month (in this case, September) closes above the line, I am bullish for the next month. If it the last complete month closes below the line, I am bearish for the following month. By looking at this chart, we see that we are clearly still in a bullish mode. Even the entire month of October has been above the moving average. I have blown up the last chart.
Please notice that the last bar (red) is entirely inside the price range of the previous bar (green). Many traders look at the monthly range of the previous month as strong support and resistance. After all, the last month could not go above or below that range, right? In this case, traders will look at the high and low created in September. A breakout of either the high or low will create a tradeable event. If we are concerned that this market is breaking down, this chart should put our mind at ease. Last month’s support is still below today’s low. For me, this is enough to know that the market is still in a bullish mode. If one needs more convincing, look at the weekly chart next. See below.
This chart is the weekly chart. We want to see if the trend is still up. The long term trendline goes back to 2009 (the red line). The medium term goes back to 2010 (the green line). The short term is from 2011 (which is the blue line). The price action is above all the trend lines. That clearly means that we are still in a bull trend. If we have not belabored this point enough, look at the daily chart.
On this daily chart, we can see the trend line that started from the October 2011 lows. Even on the daily chart, we see the price action is above the trendline. So, no matter how we slice it, we are in a bullish mode still. We need to use these pullbacks to look for bullish trades that we can enter. I suggest looking at stocks from the S&P 500 that were up today. That shows bullishness when the market was weak. The next time the market goes up, those stocks should have above average advances.
The article was first published by RTT Quant.