In the last post I discussed why the 20% idea wasn't helpful for investors. Regardless of where you bought in, sitting through a 20% drop off highs without minimizing losses or protecting previous gains seems not the smartest thing to do.
So if we toss this concept, what can we use to define a market as bull or bear? And let's not forget the third type of market - sideways.
In my work the higher time-frame is always more important. Usually people look at daily charts, but we can get a clearer view of the larger move by examining the weekly charts.
As mentioned in the first post, I use several common moving averages in my work. There isn't any magic to these numbers but they are levels where the big money plays, so I want to see what they are doing and go along for the ride. These are the 20 period moving average (orange line in all example charts), 50MA (moving average for short) in purple, and 200MA in thick black.
So we can simply define a bull market as above its 50MA and a bear market below. But this isn't really enough - we also need to factor in slope. If the 50MA is rising price can drop below the 50MA and then come back easily enough. This happened several times in the S&P500 in 2004-2006 and each time it came back, ultimately making much higher highs in 2007. See chart 1 below.
But a move below a downward sloping 50MA means trouble. If the 50MA clearly acts as resistance, then the market is going lower. Period. See chart 2. This happened in late 2007 and early 2008. You didn't have to wait until August 2008 to panic; if you were a long term investor you would have been out (cash or short only) from the close of 1/6/2008 bar on.
Check chart 2; a big red bar below the flat purple line (ie no longer upward sloping) warned possible bear market from early in 2008; and then another big red bar with the 50MA acting as clear resistance in May of 2008 sealed the deal.
Which leads to our current situation. Despite the recent drop S&P500 is still above its slightly rising 50MA. Therefore it isn't a bear market yet. If this level breaks, it even be able to recover. But if it breaks, starts to slope down and then act as resistance, watch out below. Market as of 5/31 close is shown on weekly chart 3. I view its current status as "trying to remain a bull, but needs to hold!"
Lastly, whether a market is "bull" or "bear" depends on the vehicle! NDX (the technology index) still has a nice rising weekly 50MA. IWM, the ETF for the Russell 2000, already has a downward sloping weekly 50MA. You can quickly gauge the strength of the larger trend just by eyeing the weekly 50MA and its slope. This is very easy to do (and works across time-frames). From this view:
Very bullish
Apple
TLT (bond ETF)
UUP ($US ETF)
Bullish
NDX
INDU (slightly)
SPX (barely)
Bearish
IWM (Russell ETF)
XLF (Financial ETF)
GLD (Gold ETF, 50MA starting to slope down)
Very bearish
EEM (Emerging markets ETF)
FXE (Euro ETF)
USO (Oil ETF)
SLV (Silver ETF)
If you are curious you can go to a free site like stockcharts.com and pull up any stock you own or are curious to examine. Select weekly view, check the slope of its 50MA and whether price is above or below. If the latter, I don't think you should own the stock.
So if we toss this concept, what can we use to define a market as bull or bear? And let's not forget the third type of market - sideways.
In my work the higher time-frame is always more important. Usually people look at daily charts, but we can get a clearer view of the larger move by examining the weekly charts.
As mentioned in the first post, I use several common moving averages in my work. There isn't any magic to these numbers but they are levels where the big money plays, so I want to see what they are doing and go along for the ride. These are the 20 period moving average (orange line in all example charts), 50MA (moving average for short) in purple, and 200MA in thick black.
So we can simply define a bull market as above its 50MA and a bear market below. But this isn't really enough - we also need to factor in slope. If the 50MA is rising price can drop below the 50MA and then come back easily enough. This happened several times in the S&P500 in 2004-2006 and each time it came back, ultimately making much higher highs in 2007. See chart 1 below.
But a move below a downward sloping 50MA means trouble. If the 50MA clearly acts as resistance, then the market is going lower. Period. See chart 2. This happened in late 2007 and early 2008. You didn't have to wait until August 2008 to panic; if you were a long term investor you would have been out (cash or short only) from the close of 1/6/2008 bar on.
Check chart 2; a big red bar below the flat purple line (ie no longer upward sloping) warned possible bear market from early in 2008; and then another big red bar with the 50MA acting as clear resistance in May of 2008 sealed the deal.
Which leads to our current situation. Despite the recent drop S&P500 is still above its slightly rising 50MA. Therefore it isn't a bear market yet. If this level breaks, it even be able to recover. But if it breaks, starts to slope down and then act as resistance, watch out below. Market as of 5/31 close is shown on weekly chart 3. I view its current status as "trying to remain a bull, but needs to hold!"
Lastly, whether a market is "bull" or "bear" depends on the vehicle! NDX (the technology index) still has a nice rising weekly 50MA. IWM, the ETF for the Russell 2000, already has a downward sloping weekly 50MA. You can quickly gauge the strength of the larger trend just by eyeing the weekly 50MA and its slope. This is very easy to do (and works across time-frames). From this view:
Very bullish
Apple
TLT (bond ETF)
UUP ($US ETF)
Bullish
NDX
INDU (slightly)
SPX (barely)
Bearish
IWM (Russell ETF)
XLF (Financial ETF)
GLD (Gold ETF, 50MA starting to slope down)
Very bearish
EEM (Emerging markets ETF)
FXE (Euro ETF)
USO (Oil ETF)
SLV (Silver ETF)
If you are curious you can go to a free site like stockcharts.com and pull up any stock you own or are curious to examine. Select weekly view, check the slope of its 50MA and whether price is above or below. If the latter, I don't think you should own the stock.
RSS Feed