|Bear Market Call Is No Wolf Cry: Opinion|
|Written by L.A. Little|
|Monday, 05 September 2011 10:51|
L.A. writes a piece weekly for TheStreet.com and this week's article is reprinted here with permission.
Last month I penned a piece for RealMoneyPro subscribers pointing out that the bull market that has existed since 2009 was most likely at an end. I remained cautiously bullish throughout, because the qualified trends on the intermediate-term time frame have never told us to do otherwise. Well folks, now they have!
Here are those qualified trends for the major market indexes and sectors as they existed on August 7. They have improved slightly on the short-term time frames (as they should), but it hasn't changed the larger picture or probabilities.
Since joining TheStreet and RealMoney team in 2009, I have held steadfast to the idea that we had to trade what was in front of us, and that was a bull market. Despite being a difficult market to trade, I have labored to stay cautiously bullish in order to exploit what was in front of us. I never liked this market because it has been suspect bullish almost the entire way higher, but that's another story for another time.
The bear market is coming! Although it doesn't always happen this way, both the sector and market qualified trends on the intermediate-term time frame transitioned to confirmed bearish. Confirmed bearish trends have a less than 50-50 chance of returning to the bullish trend from which they have fallen.
As I labored to point out in that article, just the fact that the qualified trends had changed didn't mean that it would be straight down from there. In fact, the preliminary statistics I am working on for my next book suggest the odds of retesting a swing-point low in this time frame happening within 5 bars (5 weeks in this case on the intermediate-term basis) is about 40%. Stretch that out to 10 bars and the odds increase to roughly 60%. That, my friends, represents the bounce probabilities. That swing-point low on the S&P 500 is 1249.
The chart I showed back then remains as valid today as it did then. The only difference is, now it is probably believable. Here's the original chart.
On this chart, you can see that the first resistance zone (which should hold the first bounce) ranges from 1249 to 1262. The lower 1250 area is probably as much as can be expected on the first bounce, and given the pain of the fast price decline, maybe 1240 might be all that is achieved. We are nearing those numbers now.
Assuming the market works lower after the first bounce yet holds the recent lows, a more sustained push higher can then begin -- one that could get through this powerful 1249 to 1262 anchored resistance zone, turning doubters into believers again. Looking at the calendar and my qualified trend probabilities, that advance could test the second resistance zone that ranges from 1280-1290 SPX and might do so in 8 to 10 weeks from the lows. That would put the calendar at the end of September or the middle of October, which is when the probabilities of a bounce failure reach a pinnacle.
It's interesting that this happens to coincide with fourth-quarter earnings, which could prove to be a pivotal period, if the big bounce unfolds as envisioned.
So let's just assume that the remaining few weeks unfold in this manner. If so, that may represent the last great escape from long positions at what will probably be the best prices for some time to come. I know that is a dire prediction and it comes when the earnings remain stellar and the Fed remains on the side of this market, but that is what the probabilities suggest as most likely now.
If you ask me what to do, I would say to first print this article and use it as a simplistic roadmap. In a few weeks when prices finally make it back up to the levels outlined, let's see how this tape plays out. Wrong or right, it's the right trade to get very safe on the eventual lift, even if you don't want to short the market into that lift.
Thanks for listening and until next time, just keep trading the charts.