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End of Bull Market – Will the Bears finally get it right this time?
Short-term traders have been watching the triangle pattern on the daily chart of the SPX (see chart below) for the last few weeks and this has clearly been resolved to the downside, with prices not only breaking below the triangle but even breaching the 50 day moving average. This quite clearly signals the end to the October rally, so is this going to be another short-term correction like August or something more?
I decided to look at the longer term charts (see 5 year SPX chart below) for more clues. It looks like the August correction was the first break of the 29 month uptrend line. Frequently, there is a rally back to test the back side of the uptrend line and if that fails, it means the end of that trend. Despite a few scary corrections, we have been in a bull market since March 2009. The sideways market from January to July 2011 formed a “head and shoulders” which is a classic topping pattern, similar to what we saw from April to December 2007. Prices broke below the “neckline” in August 2011 (and Dec 2007). There was a short rally back to neckline but when that failed, it started a new downtrend which lasted for months. With the latest developments, it looks like we may be starting a new downtrend, which may last for months.
Of course the bears could be wrong again and many bears (myself included) have been frustrated by reserve bank interventions before. The markets did a U turn in September 2010 after QE2 was announced. This time the correction has been due to the problems in Europe and now everyone expects the European Central Bank to do exactly what Ben Bernanke did in QE2. The least painful solution to the European debt mess is for the ECB to buy European government bonds which amounts to printing euros. Despite loudly claiming they will do no such thing, the ECB has been quietly increasing their bond purchases to keep the bond yields down (and confidence up). I had to think about what the implications would be to the stock market if the ECB did this. The euro will probably fall, just as the US dollar did when the US printing presses were turned on. If the euro falls, this should mean the US dollar would go up. When the USD fell, commodities and stocks which were priced in USD went up so if the reverse happens with the USD, we should see these assets fall which means the US stock market should go lower. The Australian market tends to follow the US market so it would most likely go down as well.
From my own analysis, which was supported by a Confirmed Down market call from Vector Vest for the US market on Nov 17, I feel confident enough to add to my bearish positions (with a tight stop) even though I am suffering a bit from bear fatigue. For those who agree with the above and want to hedge or profit from a falling market, check out my previous post How your SMSF can profit when the market goes down. Stay safe!
- Christina McDonald
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Makes a lot of sense to me, I don’t think we’ve seen an end to the bear market yet. By the way, there’s a free market timing indicator, similar to VV’s, at http://www.mtrig.com/Members/TimingModel.aspx.