Markets go through stage two bull markets, stage three topping phases, and stage four declines. I define a bear market as one in which the market is below its long-term 200 and 150-day moving averages and those moving averages are acting as resistance and bull markets as the opposite. Since June the market averages have stayed below these moving averages in the classic bear market pattern.
If the market ends up breaking through its August lows over the next few weeks then we’ll be able to look back and see the whole sideways pattern that has played out over the past 11 months as a massive stage three top. Huge and rapid declines would then ensue over the rest of the year and probably well into the first half of next year.
This is why the 1040 level on the S&P 500 is so important right now. I’ve been telling people I’m bearish on the stock market and that they should use rallies to lighten up on any lagging positions they have and have cash available to use at the end of the bear market. A few have listened to this advice but most have not – and some have been driven to anger by it.
But most people simply are unsure. During the big moves down they start to think of the bearish scenario, but then during the big rallies like we saw last week they worry that if they sell they could miss out on more gains or else they just think the market is bullish again.
This causes uncertainty. People just are not sure what to do.
Over the next few weeks the market is going to show us whether it is going into a vicious bear decline or is going to really get bullish again. If you pay attention you won’t need to guess anymore. If you recall at the beginning of the year I made a stock market forecast for 2010 in which I said that the stock market would go sideways for most of the year and that the sideways pattern would probably come to an end towards the end of the year.
One thing that I based this forecast on was the fact that the 200-day Bollinger Bands had grown so wide apart that they most likely would come back together again before the year is over. What happened is that the market went up so quickly form the March lows that there was almost no chance by the end of 2009 that the rate of that advance would continue. That meant the market would likely spend most of 2010 going sideways and prepare itself for another big move that could be up or down. I couldn’t point to anything technical at the time that could predict which way the market would go at the end of 2010 but I felt for certain that the first half of the year at the least it would go sideways with just a bunch of fake out moves. That is exactly what happened.
For the past few months though I have thought that we actually were slipping into a bear market. Now what is key is that the sideways pattern is going to come to an end. The Bollinger Bands that were so wide apart back at the beginning of 2010 are now coming back together.
Although the swing have been violent the market is actually trading in a narrower range than it was six months ago.
I don’t see the current move as being sustainable and expect the market to pullback again once it comes to an end – no matter whether the market is going to be bullish or bearish. The market is now extremely overbought on a 60-minute chart and has stiff resistance at its 150 and 200-day moving averages. What is more practically every single stock exchange in the whole world is in exactly the same position.