Friday, February 1, 2008

Bear Market Rallies

I was reading some articles today and did some research myself about bear market rallies and how they go. I found it interesting. Right now, we are up around 8.5% on the S&P 500, and around 8% on the Nasdaq since the lows of January 23. I looked at the bear market of 2000-2002, because it was the longest one we’ve had in quite a while and while I don’t expect this bear market to be as awful as that one, I see a few similarities (internet bubble/credit and housing bubble). I looked at both the S&P and the Nasdaq and here is some of what I found:

Shortest Length: Nasdaq – 2 weeks S&P 500 – 3 weeks

Longest Length: Nasdaq – 2 months S&P 500 – 2 months

Biggest Gain: Nasdaq – 31.5% S&P 500 – 19.7%

Smallest Gain: Nasdaq – 11.9% S&P 500 – 8.8%

I don’t know if the percentages are as applicable now because, although we have been quite volatile, there was certainly more volatility back then, but they can act as guidelines as to what we can look for. I think the time factor is important to look at two, to maybe protect traders from shorting too quickly and also for possible times to start looking at shorts again because the rally might be getting long in the tooth.

Looking at the charts of these indexes, in many cases the 50 and 200 day moving averages did act as resistance, but not always. In those cases where the indexes did get above their moving averages, I noticed that the 61.8% fibonacci levels acted as resistance and a turning point in several cases. These are no guarantees to perfectly predict when the market may turn back down, but it will help focus on some levels to look to start shorting again.

On the S&P, I think that level is probably around the 1425 level. If it gets to this level, it will have been an 11% rally. I feel this level is important because it is near the 61.8% fib level and the 50 day moving average is right in this area. This rally is in its second week, so there is probably a good chance it can continue for another week or so, which will probably take it up to this area.

S&P 500

On the Nasdaq, I am looking at the 2525 area as a possible turning point. This is right at the 61.8% fib level, the 50 day moving average is almost at this area now, and the indexes, if they get this far, will also face overhead supply from the November lows. If the Nasdaq gets to this level over the next week or so, it will have put in a 13% rally from its lows.

Nasdaq

Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

The fact that IBD didn’t even recognize yesterday’s action as a follow-through day tells me that I am likely correct in saying that this is not the real bottom of this bear market. Cramer and all of the talking heads at CNBC can say otherwise, and they may be right in the short-term, but I will be looking at the levels above very carefully to possibly load up on short positions once again.

I don’t want to go on another rant against the Fed and our country’s fiscal policy, but I found another interesting article about where this unconscious cutting of rates is going to take us in a few more months or years. Here’s an excerpt I found particularly profound:

"Bernanke is printing huge amounts of money. He's out of control and the Fed is out of control. We are probably going to have one of the worst recessions we've had since the Second World War. It's not a good scene."

I couldn’t agree more that our federal government, including the Fed, is totally out of control. Whatever happened to the idea of a free market economy where government stays out of things? Is that just a dream now that has long passed? Another article I found interesting comparing our current plight to Japan in the 1990's. Let's hope it doesn't turn out like that.

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