Trends - Pull Back or new Bear market? 6/9/2006

The recent market fall has many worried.� Is it just a pullback and the cyclical bull market will resume soon, or is this a new cyclical bear market?� According to many pundits, if the market pulls back 10-15% it is a pull back.� If the market falls 20% or more then we have entered a new Bear Market.� Well, let's look a little more closely into this potential change in market trends.

First, start with the big picture as presented in Market Cycles.� In summary, history shows us that the stock market moves in long secular bull and bear market trends lasting 15 - 20 years on average.� Within these long trends there are shorter cyclical bull and bear market trends that generally last 2-3 years.� The last secular bull market began in 1982 and ended in 2000.� We then went into a cyclical bear market from 2000 to early 2003.� Starting in early 2003 we entered a cyclical bull market.� The question is have we seen the end of this cyclical bull market and are we now entering a cyclical bear market?

The following chart is a classic example of a cyclical bear market starting in 1966 and lasting till 1982.� Notice how it began at about 1000 and ended at about 800 while encountering several good cyclical bull and bear markets.� Also, note in 1966 that the DJIA fell more than 25% touching 750, before rebounding to over 900.� So, here is one example where the pundits were right.� Also, notice that is is very important to stay on the right side of the cyclical trend to make money.

The following chart is of the weekly S&P 500 for the last 7 years indicating the cyclical bull and bear phases of market.� The 65 week moving average acts as support during the bull phases and as resistance during the bear phases.� As of Friday June 9, 2006 the S&P 500 is touching this important indicator.� The 23 week Relative Strength Indicator (RSI) stays above 50 during bull phases and below 50 during bear phases.� It looks like we will have a much better indication of whether we are entering a new cyclical bear market.� However, I suspect we are entering a new cyclical bear market, but we shall see soon.

This next chart shows that the Nasdaq is nearing a key support level near 2100.� When combined with the Stochastic and Ultimate indicators it gives us another picture to consider.� First, the support level near 2100 needs to hold over the next week or so for the up trend to continue.� Notice that whenever the Stochastic falls through 20 the Nasdaq rebounds.� However, it is more difficult to say the same for the Ultimate indicator.� What this tells us is that we may see further weakening or we may see a rebound.� We will know more in the next couple of weeks.�

Unfortunately, that is the nature of technical analysis.� Sometime you must wait to see what happens.� Making a decision before you have better information, like entering buys, often causes one to enter a loosing trade.� It is still time to be cautious on both the long and the short side.� I am waiting until I get a better indication of the cyclical trend.� As a result, I am not buying and I am adjusting my stops on a more frequent basis for all outstanding long and short positions.�