Lessons from the Pros


Bear Sightings But Is It a Bear Market?

Many investors are extremely nervous and worried about the future of their equity investments in their retirement accounts.  Disappointing Non-Farm Payroll numbers last week coupled with the news of economic weakness in India and China have traders and investors on edge and wondering what to do.

From a technical standpoint, most of the equity markets have not gone bearish yet, but are dangerously close.  There is no doubt that the weekly uptrend has been broken due to lower lows.  However, to be in a true downtrend prices have yet to make the pattern required.

Free Trading WorkshopIn review, price is in an uptrend when it makes a higher high after making a higher low.  As long as higher lows are made, the bullish trend is intact.  Once a lower low is made, the bullish trend has been broken.  Remember, this only signals the end of the bullish trend, not the start of the bearish one.

To mark the start of the bearish trend price needs to make a lower low after a lower high.  Once this happens then trend can be said to be in a downtrend and shorting positions are favorable.  Applying this logic to the charts in 2008 would have helped an investor identify the start of the 2008 market crash and could have alerted them to protect their retirement accounts.

how to spot a bear market

Currently the S&P 500 is not in an uptrend.  One look at a chart and this becomes obvious.  The lower low during the week of August 28th took care of that.  In order to satisfy the definition of a downtrend, the index must break through 1867.01.  This would give us a weekly lower low after the lower high.

how to identify a change in trend

The Nasdaq Index is also showing a similar pattern.  There is more price movement needed in order to make the lower low.

trading in a bear market

The Dow Jones Industrial Index has already started its downtrend.  The high in May was followed by a lower high in July.  The downtrend officially began with the index trading below the low from the week of July 10th.  The lower low was the confirmation.

Dow weekly chart

The Russell 2000 Index is the small cap index which is often a better barometer of the American economy as it is made up of companies that do not have as much international exposure as the larger index components do.  In fact, the Russell 2000 was the first index to break down during the 2008 crash and often leads the others when the trend is changing.  This time it trailed the Dow but is bearish nonetheless.

Russell weekly chart

So as an investor, the lower lows definitely signal the uptrend is over.  This could let an investor know that they need to keep a closer eye on their investments and look for some protection.  When the lower lows enter the scene after lower highs, investments would be better off in safe havens or in cash.  If an investor is able to take advantage of the downtrend using inverse ETF’s or futures, they can even profit in bearish markets.  To learn more about how to do this, drop by your local Online Trading Academy offices today.

Brandon Wendell


DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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