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Persevering readers will know of my admiration for Stan Weinstein and his classic book: Secrets for Profiting in Bull and Bear Markets
If you haven’t yet discovered this gem, don’t let the silly title fool you. Pick up a copy at Amazon - although, I just noticed that it is temporarily out of stock!
So either order it new and wait until it is available again or order one of the used copies and get it fast. But don’t leave this book out of your trading library. Whether novice or experienced, you’ll learn something because the principles outlined in Weinstein’s book are timeless. For other books that I recommend, check out the About section.
One of the major themes in the book is that at any point in time, any market is in one of four stages: basing, breakout or advance, topping, and decline. Each of these “stages” have specific characteristics which are rather simple to recognize.
No two market periods are alike since history never repeats. But sometimes, if you look closely, it may rhyme. So here’s a comparison of the past bear market to the current one, through the perspective of Stan Weinstein’s Stage Analysis.
Something which immediately jumps out at you, even at a cursory comparison, is the lack of powerful bear market rallies. During this bear market we just rolled over each time with no real effort by the bulls to put up a real fight.
During the last bear market, the S&P 500 Index rallied about 6 times (depending on how much you want to squint) to either approach or hit its 200 day moving average. For a few brief days in early 2002 it even traded above the ever descending long term moving average. In contrast, the most recent market action has pushed price below its long term moving average to an extent not seen since the 1929 crash.
Apart from that difference, the two bear markets do have a lot in common. To start, at the beginning of “Stage Three” the 200 day moving average flattens and the shorter, 50 day moving average crosses, falling below it (marked by “1″ on the charts).
If you want to nitpick, the long term moving average started to flatten out in early 2002 due to the massive rally from the depths of the abyss of the September 11th tragedy (marked by “a” on the charts). But the 50 day moving average remained well below it - it did not cross above it.
Throughout, the long term moving average slopes downward and holds its decline (marked by “2″ on chart) until late April 2003 when, finally, the long term moving average flattens and the 50 day moving average rises above it (marked by “3″ on the chart):
The most recent bear market top was in October 2007 as the long term moving average flattened (marked by “1″ on the chart). It had done so once before in July 2006 but very quickly price recovered and both averages started to rise once more.
During this most recent bear market, the S&P 500 Index has only managed to trade back to its 200 day moving average once. This is where the long term moving average, temporarily flattened (marked by “a” on the chart) but the 50 day moving average remained below it.
“b” as in Bottom
The most interesting insight from such a comparison is the similarity that jumps out between points “b” on the charts. Both of them occurred when the long term and the shorter term moving average where both declining and when there was an extreme distance from price to moving averages. Both of them were “panic” or spike declines where the intensity of the selling fed on itself until reaching a crescendo and reversing sharply.
It isn’t too difficult to imagine the same sort of conclusion. One where the market falls once more but not beyond the swing lows it has already marked. This allows for the sideways action or basing which ameliorates the steep slope of the 200 day moving average and eventually sets up for a final push which takes price, along with the 50 day moving average, above the long term average.
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