My Bull Market / Bear Market Chart

It is the beginning of a new quarter and time to review the market in relation to its past trading history.

My Bull Market / Bear Market Chart
This chart is easy to understand –
It is in a Bull Market if price is above the Red and Blue Lines. Pullbacks into the lines are to be bought.

It is in a Bear Market if price is below the Red and Blue Lines. Rallies into the lines are to be sold and shorted.

So the markets are still in a Bear and I am still on defense. When things change, I will change.

Bottoming is a Process
The lows for the Bear Market of 2008 may be in. But bottoming will be a process.
I want to show you the process of how the markets bottomed in the 2000-2003 Bear Market. I also want to show you the indicators I use to judge how the stocks which make up the markets are doing.

2002-2003 Bottom
Here is a chart of the 2002-2003 bottoming process. There were three bottoms over an 8-month period. I do not want to focus on price. Instead, I want to focus on the two indicators below price –

$NYA200R – Percent of NYSE Stocks above their 200-day Moving Average
$NYHGH – Number of NYSE Stocks hitting New 52-Week Highs in Price

See how few companies were breaking above moving averages and hitting new highs, while the market was violently trading between 775 and 950? That was 8 months of violent trends straight up and straight down!
That trading range is 22.5%. You could make a lot of money if you timed the bottoms and sold the tops…
You can trade it. I am not interested in speculating.
The trend is still down, until proven otherwise, so I am still looking to short rallies.

In March 2003, the market hit its final lows and then broke out of the trading range as New Highs and stocks trading above their 200-day exploded! Thus confirming the new Bull Market. The big boys showed up and started to commit real money and the 4-year Bull Market was off to the races.

Current Market Conditions
The market may have already set its low and tested it once. But it is only now in Month 3 of the bottoming process. Stocks hitting New Highs and Stocks above their 200-day averages are still nowhere to be found. So I don’t think Big Money has shown up yet.

Modified Bull Market / Bear Market Chart
I want to show you a couple key points on how the markets are trading in relation to the 2000-2003 Bear Market. I have included $NYA200R and $NYHGH on this chart.

The low monthly close of the 1998 Financial Panic (Green Line) also capped the rallies of the 2002-2003 bottoming process. That level (950) is not much above current price.
See how the 2002-2003 lows stopped the current selloff dead in its tracks? The Green Line may cap this rally.

I think the key to markets that crash is that they need time to repair the damage of the crash. The best way to graphically illustrate this is to use moving averages like the Blue Line.

The 2000-2003 Bear Market hit is low in July 2002, at 775. In July 2002, the Blue Line (12-Month EMA) was at 1078. It took 8 months for the Blue Line to catch up to price. The key signal for the end of the Bear was the explosion in the number of New Highs and Stocks crossing above their 200-day, while price was breaking above the Blue Line (Black Arrows). 8 months of healing was enough and Big Money showed up and bought!

Do you see where the Blue Line is right now, in relation to price? The low in November 2008 was 741, while the Blue Line was at 1216! The Blue Line is falling at a rate of 46 points per month, so here is a chart of where it should be in future months. I put in the yellow box at 940 in May 2009, because the market closed today at 934. So we may have another 4 months until price crosses and Big Money starts buying in earnest.

I have no clue when the Bear Market ends (nobody does).
I know that history tells me that at best, price should retest the lows of November 2008. I also know that I have not yet seen any new leadership being bought on big volume. Finally, I know that I have methods for evaluating the internals of the market to determine when it is time to reallocate money back into stocks.

When big money shows up, I will buy too. For now, I wait. And look to short a rally that has a high probability of failing.