Bear Market Rally or Start of Bullish Market
Over the last few weeks the Market has rallied from its summer lows. The question on everyone's mind right now is, could this really be a breakout Bullish run to the end of the year or is this just another Bear Market rally. Every time the Market gets ahead, it takes a giant step backward. Right now it is hard to make the call.
What is a Bear Market rally? A Bear Market rally is a rapid increase in the S&P 500 and Dow Jones Industrial Average (DJI) while still in an overall bear market. For major U.S. indices, a Bear Market occurs when the Market moves down by 20% or more in at least a two-month period. In May, 2011, the high was 12,807. By the beginning of October, the Market had dropped to 10,655. This summer move down was very nearly 20%. But during October alone, the Market flew back up to 12,208. Bear market rallies create upward moves of 20% or more in a few weeks, so the immediate conclusion is...Bear Market rally.
There are some additional flags that identify a Bear Market rally. First, there should be a major price reversal on the day of the low that could look like a hammer candlestick. Looking at the daily DJI chart, on October 4th, in fact there was a very large hammer candlestick.
Second, there could be a significant volume increase on the last day of the bottom. In fact there was major volume on October 4th.
Third, with the Bear Market rally, there should be around a 20% move up off the bottom, at which time the Market begins to stall and trade sideways. On Octber 28th, the Market regained much of what it had lost, back to 12,231, nearly 20% regained. But since then, the Market has floundered, trading sideways, even going back down to a low of 11,657.
Now comes the fourth flag. If this really is a Bear Market rally, then after a number of sideways movement days, the Market would begin to sell off again and continue its original downward trend. This is where we are right now. Will the Market resume its sell off or will it climb higher? This will tell whether or not it is a Bear Market Rally.
On November 2nd, Citigroup released a note saying that "we believe the bear market rally is behind us and anticipate a move towards the 1,000-1,015 target over the weeks and months ahead." This was released just 1 day after the Market dropped 500+ points. Is Citigroup right or wrong...only time will tell.
There is one other consideration regarding this Market. Right now the Market is sitting on its daily 200 moving average. It has been unable to penetrate the 200 for 5 trading days. So it is not clear that the Market can make new highs. Bottom line, whether this is a Bear Market rally or the start of a Bullish trend, when the Market sits on its 200 moving average for days on end, it is best to sit on your hands and wait and see before you decide to participate.
Barbara Cohen CIO, Shadowtraders, and professional day trader, specializes in teaching students how they can be trading futures with their own trading system and trading strategies. Ms. Cohen has helped hundreds of traders achieve their goals trading. Find out if trading futures is for you by attending one of Ms. Cohen’s Free Webinars. Check out my Futures Trading Articles. For more information, send an email to shadowsupport@shadowtraders.com or call 866-617-2037 today.