We all know bear markets (NYSEARCA:SPY) have nice bounces and we have just seen a couple to $428 and $412. These were well known resistance levels, so we should not be surprised when they stop a bounce, especially since this bear market is still looking for a bottom.
We know bad news is coming on the economy, earnings and employment. The bear market is anticipating this news. When the bad news is behind us, and the market sees good news in the future, it will start the next bull market. Meanwhile we look for bounces in a bear market. Where is the next one starting and how far up will the bounce take us?
The last bounce to $412 showed us that $392 was a strong support level. That level now becomes an important resistance level. So the second part of our plan is to target a bounce from $364 back up to $392. Will this happen? We think it is probable, so let's make it our base case for planning purposes.
Well on the chart below you can see that there is already a positive higher low and a blue line drawn under it. Let's assume there is some good news on the Ukraine, like Putin being deposed. That would maintain this positive, higher low bottom we have in place. It could take price up to $412 again, smashing above strong resistance at $388-392.
There is no good news on Russia, the Ukraine, Europe, Asia, inflation or employment. The latest drop in FedEx (FDX) spreads to all the global companies in the US and earnings forecasts drop or are not given at all. The SPY breaks below $364 and targets $344 as shown on the chart below. Dropping PEs and earnings take stocks down.
Notice in the above cases, we do not make a case for the end of this bear market and a "golden cross" with the 50-day moving average breaking above the long term downtrend in the 200-day moving average. The reason we don't include this option is because this bear market is just ongoing, and there is no bottom in place yet.
The next bull market cannot start until we probably have panic, exhaustion selling (enormous volume and big gap down in price) and then a bottoming process. What is that? Price bounces along the bottom for awhile before turning up and starting the next bull market. The history of bear markets tells us this.
The exact numbers are not predictable, but the pattern of a bear market bottom is very well known. Every technician knows what a market bottom looks like. You may not be able to catch the exact bottom, but it is a Wall St. myth that you can't identify bottoms and tops. It is done daily by day-traders and weekly or monthly by investors, Every portfolio manager is looking for the bottom to buy or top to sell in any stock for the portfolio. It is difficult to do and that is why portfolio managers are paid so much money.
We do not know if Putin will be impeached or when inflation is ready to reach the 2.2% target of the Fed. However, we do know support and resistance levels. We do know there will be another bounce. When it happens we can recognize it and make money. Just as we can recognize this drop in the market from $412 and make money as the market goes down looking for support and the next bounce. You can always make money in the SPY whether it is going down to support or up to test resistance.
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Tom’s book "Successful Stock Signals for Traders and Portfolio Managers" is available on StockCharts.com and Amazon. The StocksInDemand.com system is designed to make money using a combined fundamental and technical grade for each stock. Tom received his MBA in Accounting from St. John's University, where he taught courses on the stock market. He marketed fundamental research, technical research and quantitative research to professional portfolio managers during his Wall St. career.
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