Tuesday, 27 November 2018

Stock Market: Is This the Start of Bear Market ?

Another way of putting the question is, "Has this bull market (which started in 2009) topped in September 2018?"

I'll attempt to answer that question in this post.

If one looks at the chart below and sees that once prices broke below the trend line AB at point B, the bull market that started in 2003 had ended in the final week of 2007. Prices that broke down at B continued to fall until it bottomed at C, some 54% later.

Weekly SPX from 2002 to 2018 showing 2 important supports
Weekly SPX from 2002 to 2018 showing 2 important supports
(Click chart to enlarge)


One can easily draw similar trend line CD, and come to a similar conclusion that because we've broken trend line that started in 2009 at D on Oct 2018, this marks the start of the bear market.

If we only look at only at these 2 trend lines AB and CD, such conclusion seems inevitable.

I've seen many chartists drawn the trend line AB and CD, which are simple and obvious. I haven't seen too many draw these 2 blue trend lines MN and XY in the chart below.


Weekly SPY from 2002 to 2018 showing 4 important trend lines
Weekly SPY from 2002 to 2018 showing 4 important trend lines
(Click chart to enlarge)

I consider these 2 blue trend lines (MN and XY) far more valid and/or significant than the 2 black trend lines (AB and CD) because these 2 blue lines were being tested on both sides, meaning they have served initially as long term resistances and later as long term supports.

On a cursory glance, one would jump the gun that these additional blue lines won't change the big picture. Both of the prices above their respective blue lines look like head fakes / false breakouts. But there is a subtle but major difference between these 2 pairs of trend lines in the 2 bull market periods in question.

Let's zoom in and have a closer look at AB and MN (see chart below). These 2 trend lines practically intersect on the final week of the year 2007 (it actually intersected on Oct 2017). The most crucial point is this, because of their close proximity, in the final week of year 2017, prices broke down below both of these 2 trend lines in the same week. As it put in a bear / relief rally subsequently in the next several months, it rose back to X, but couldn't manage to rise back above either points B or N where it broken down from. The blue trend line MN now acts as resistance.

One more thing that endorses or validates XY line. As SPY broke above this trend line in mid September 2017, SPY put into the most explosive rally that we have seen in decades (not years). This isn't an unusual breakout behaviour. The more significant the trend line, the more powerful is the breakout. It's also not unusual for the prices to back test the trend line where it breaks out from.

The reverse is also true. The more significant this trend line, the further it would drop if SPY breaks below it.


Weekly SPY from 2003 to 2009
Weekly SPY from 2003 to 2009
(Click chart to enlarge)

The significant difference between the 2 periods of bull market is that in the current bull market prices are still supported by blue trend line XY. It hasn't broken below it, yet. Unlike the end of 2007 where prices have broke impulsively below AB and MN. As long as prices stay above XY, we can't say that we're in the same situation as the end of 2007. Not until prices break impulsively below XY.

Side Note:  Just an interesting observation. The slopes of the 2 blue lines are very similar (14° and 15° respectively) . If you draw a continuous blue line that start at M and ends at Y (from 2004 to 2018), and if you wiggle this new line a bit, it would touch most of the points that these 2 blue lines touch. Not perfect, but does a very good job.


Many traders and pundits call for a retest of Feb intra-day low of 253 in SPY. If prices do go there, we can consider that we have a impulsive break below the blue trend line and call for the start of the bear market. But this retest of Feb intraday low didn't happen.

Is it a mere coincidence that this same blue trend line has supported prices throughout this year?


Daily SPY for 2018 showing important lows being supported by trend lines
Daily SPY for 2018 showing important lows being supported by trend lines
(Click chart to enlarge)

Here's what i think the market direction going forward in the short term (next few months). We may put in a rally and back test the underside of trend line CD before coming back down to test XY again (See 2nd chart from the top).

I think we have mostly sideways trading in 2019. But as long as prices stay above XY line, we can reject the thesis that a bear market has already started.