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The Brave New Bull Market?


Waiting for the bear to return - with a vengeance.


Into the distance, a ribbon of black
Stretched to the point of no turning back
A flight of fancy on a windswept field
-Learning to Fly (Pink Floyd)

The NAZ is back in the black for the year: It closed 2008 at 1577.03. Yesterday, it scored a close of 1587. Is it a new bull market?

One way to determine a major change in trend is when a previous leg (in this case a down leg, as it has been a bear market) is completely offset. So far, the popular averages, including the NAZ, haven't offset their legs down starting from either the January peaks or their February peaks The NAZ is right at that inflection point, while the DJIA has to recapture 9000-ish, and the S&P would need to recapture 944.

Nevertheless, holding a 50% retracement is often a bullish sign of a longer rally phase, and may indicate the notion of a complete "overbalance" of the prior move down. That mid-point of the leg down in the S&P from the January high of 944 to the March low of 667 is 805. Holding 805 on a weekly closing basis puts the market in a stronger position.

The bulls would love to see a close today above that level, and the index is certainly poised for such a close. But these days, you never know: You have to wait for the fat lady rings the buzzer.

A look back at history shows there are many ribbons of black that streak across the red sky of the bear before a bull market in earnest is born. Below, I show the 1929 to 1932 experience, because of the parallels to the rate of descent of the current decline - and because this is the direst economic crisis since then.

Consequently, the psychology reflected in the patterns should be revealing. The big difference is that the initial leg down in 1929 was a crash off the top that played out in approximately 70 days - from early September to mid-November. Sound familiar? That echoes the crash last fall.

The difference, of course, being that the top in our market occurred a year before. Apparently, the Working Group succeeded in heeding Ronald Regan's directive after the crash in 1987, when he said something like, "I don't know what that was, but don't let it happen again."

Voila, the creation of the Working Group. So, instead of a crash like 1987, we got a slow motion crash that played out over 13 months.

Now, of course, the question is what happens from here: Which path will the market take, which analogue will it follow, if any? Historical patterns will prove valuable, as they help reveal the prevalent cycles of psychology. Even if there isn't a parallel to be followed, a divergence from certain patterns of time and price from the past will in and of themselves be valuable information that something different is occurring.

No positions in stocks mentioned.

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