Trader’s Narrative

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I was looking at some charts and noticed that the 1982 super bull market bottom was actually a classic “bear trap”:

This is where price breaks down below the support line (green), making a new low (red arrow) but then reverses quickly above the support (now resistance) and then continues higher. That little blip you’re looking at was the last throes of the bear market that tore through portfolios all through the 1970’s and early 1980’s. It was the last chance that investors had to buy shares at those depressed prices because from then on, from a long term view, the market marched relentlessly higher.

Those that shorted into the new break-down, had to (sooner or later) cover at much higher prices, and by doing so, propel prices higher. As well, those on the sideline were seduced by the new bull market to put their money to work on the long side. And a trend was started.

What we see in the short term as a “bull trap” can also be viewed as an engulfing candlestick formation on a weekly or monthly perspective. Opining about the McClellan Oscillator, this is what I wrote towards the end of February:

Another possible scenario is for the market to pierce the November lows, trapping new bears and crushing them as it bounces up. Always remember that the market is no one’s friend, and it doesn’t owe you anything. In fact, more often than not, it is there to distribute the most amount of financial pain, to the most number of participants.

The market never repeats itself, but it can sometimes rhyme. What I described above was pretty prescient (if I do say so myself!). Take a look at the familiar chart of the recent S&P 500 Index (SPX):

Of course, if we draw the support line differently, by having it coincide with the January 2009 low, then we see that the November 2008 low was a failed “trap”. And obviously this pattern could also find a similar end. No one really knows the endurance of this recent rally. As I pointed out, one of the characteristics of this bear market has been a remarkable lack of any real counter rallies.

But in some pockets of the market like the tech sector and the semiconductors especially, there is a speculative mini-mania. As well, some of the other internal market health measures have become stretched as a result of this rally - just at previous resistance levels. This is the real test of the nascent rally then. There is no question that we have seen a considerable degree of the bear market and put it behind us - at least as far as any historical measure can tell us. The real question is how protracted the healing and recovery will be.

Last Monday (May 21st, 2007) I wrote about the deep oversold condition in the US REIT sector and why I thought that it was a bear trap.

So far, according to the CBOE Dow Jones REIT Index (DJR), things have played out according to that script. After reaching just below the 200 moving day average and giving the bears a glimmer of hope, the index reversed up. It formed a beautiful W bottom (double bottom) and after yesterday’s showing it is now once again above its long term moving average.

The snap back provided some really nice wide range days as the shorts scrambled to cover and ended up throwing more momentum behind the uptrend. I’ll show yesterday’s graphs for two REITs which I mentioned in my original post last week.

Here is the intraday chart for Kimco Realty Corp. (KIM):

And here is Vornado Realty Trust (VNO):

Nothing ever goes straight up, or down. While short term, nimble traders can take advantage of shap snapbacks like this one, don’t expect the sector to keep going up day after day.

The REIT sector should consolidate its recent gains and start climbing back up slowly. If you want a good entry for long term holdings, here it is.