Archive for August, 2009
New Bull Or Bear Market Rally?
Is this a new bull market or just another bear market rally? We can look to the charts to get an idea of where things are going. The secular bull market double topped on the S&P at about 1575 on Oct. 1, 2007 which was the start of the secular bear market. Some analytsts claim the bear market started in 2000. I don’t see that as a possiblity. Between the low of March, 2003 and the high of Oct 1, 2007 the market gained almost 100% and the rally lasted 4.5 years. Bear market rallies don’t gain that much or last that long.
We know that we are in a secular bear market due to the worldwide macro economic conditions that have developed and the massive market sell off that was fear and panic driven. Between the S&P low of Nov. 21, 2008 and the lower low made on March 6, 2009 the macd moved higher. This is a positive divergence that indicates the market will rally. The vix hit a double top of 81 on Nov. 21 and then a much lower reading of about 50 on March 6. This indicates that we have hit an intermediate to long term bottom at these levels.
There are 3 major downtrend lines that define the bear market. The major downtrend line connects the Oct. 8, 2007 high to the May 19, 2008 high. In the current time frame this downtrend now sits at around 1200 on the S&P. The secondary downtrend connects the May 19, 2008 top to the Sept. 1, 2008 top. That downtrend coincided with the 50 day moving average on the 3-year chart and was broken in July, 2009. The third downtrend connects the Sept. 1, 2008 to the Jan. 5, 2009 top. That downtrend was broken in March, 2009. As of now we have broken through 2 of the 3 major downtrends that define this bear market. The S&P has also broken through to the upside of an inverse head and shoulders pattern that developed after a major market sell-off. This is highly bullish and the projected top of the pattern is at about S&P 1200, right where the bear market primary downtrend line now sits. Therefore it appears that the market is going to rally to about S&P 1200. There will be pullbacks and corrections along the way but the overall market direction at this time appears to be upward. What will happen when we reach 1200 is uncertain as there is a lot of resistance at those levels.
If the worldwide economy recovers strongly the market could punch through and test its old highs. If commodity prices rise too fast or some doo hits the fan and puts a damper in the recovery the bear market could resume. Therefore as of right now we are in a cyclical bull market within a secular bear market until proven otherwise.
