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Minyan Mailbag: Bear Market Rally or Bottom?


Long-term downtrend remains.

Prof. Collins,

I found you in an article on Minyanville. It mentioned you welcome comments, however I was wondering if you could comment on this. Does the chart below indicate a current bear market rally to you? Are we technically in a bear market and do the support levels below appear justified?

Click to enlarge image

Thanks in advance,
Minyan Ernest


Thanks for the e-mail.

From where I sit, the action in the charts appears to reflect a bear market rally rather than the bottom. I added a few trend lines to your work - which was pretty much spot on.

In early January the S&P 500 broke the long term uptrend off the 2003 low. This is obviously not a good sign technically regarding the health of the markets. This occurred right after a failure at the horizontal resistance from the last bull market peak as well. In the course of breaking that important trend line we took out a shorter-term (albeit very sizeable) double head and shoulders pattern.

That break suggested a measured move back to the 1150-1175 area which would correspond to a 50% Fibonacci retracement of the bull move off the '03 lows coincidentally.

Click to enlarge image

I suggested in my piece that a rally back to re-test the 1350-1405 area was possible, but that strength was likely an opportunity to sell. We cannot deny the charts have improved in the shorter term and there have been quite a few tradable set-ups out there. We had a retest of the low during which volatility and sentiment measures reached extremes that in the past were consistent with a tradable bottom. We had a couple of 90% up volume days which is also a positive signal technically. But none of this negates the damage that has occurred however.

Bigger picture, technical analysis is but one piece of the puzzle. Perhaps I'm allowing a big picture view to skew my perspective, but I simply think the type of damage we've seen takes time to repair.

The credit markets are still in a state of chaos. We have historic volatility in areas of the market where that shouldn't exist, in things like money markets and short-term Treasuries. Corporate spreads are still +800 over. The pressure in credit markets continues to mount even if it is being ignored (for now) by stocks. That disconnect will eventually get resolved.

The Federal Reserve and Treasury Department stand determined to do whatever they can to grease the wheels of the system in an attempt to keep it functioning. Therefore we have to respect the possibility that this could buy time and allow the markets to creep higher in the process. In all reality though, no amount of grease can fix the problem when the wheels have already started falling off.

For further discussion of the technical landscape, please see my piece on March 12th and Professor Shedlock's follow-up on March 13th.

Hope that helps.
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