Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Stocks Bear Market Rally Faces Numerous Hurdles

Stock-Markets / Stocks Bear Market Oct 21, 2011 - 01:30 AM GMT

By: Chris_Ciovacco

Stock-Markets

Diamond Rated - Best Financial Markets Analysis ArticleAs we mentioned yesterday, a fear-induced buying climax may occur in the coming days as shorts cover and managers sitting on cash move to the “I can’t take it anymore” stage. While a sustained break above the 1,266 to 1,276 range on the S&P 500 would increase the odds of stocks continuing to march higher, evidence still suggests the current move is a bear market rally that will be fully retraced.


The S&P 500 faces resistance from its 100-day and 200-day moving averages. As shown below in the chart from the 2000-2002 bear market, these levels often bring out sellers. The first bear rally attempt in 2001 was turned back by the 100-day moving average (shown in blue). In 2011, the 100-day current sits at 1,234.

The chart below zooms into the first reversal point shown in the chart above. Notice (a) how quickly the gains from the bear market rally were erased, and (b) covering shorts prematurely or buying before long-term bullish signals surfaced proved to be a mistake (in the 2000-2001 case). We have to keep an open mind about better than expected outcomes if we approach the 100-day or 200-day in the coming days or weeks, but until we see something that does not look like a bear market rally, we will remain patient.

A similar rally to the one we are experiencing today occurred in the spring of 2008. Striking similarities to the 2008 rally shown below remain in place. Consequently, stocks may continue to march higher in 2011. The 2008 rally failed at the 200-day moving average. The 200-day moving average in 2011 sits at 1,275.

Similar concepts apply: The chart below zooms into the reversal point shown in the chart above. Notice (a) how quickly the gains from the bear market rally were erased, and (b) covering shorts prematurely or buying before long-term bullish signals surfaced proved to be a mistake (in the 2007-2008 case). We will see how things unfold in 2011, but it is important to know common reversal points for strong bear market rallies.

The next three charts show (a) the current S&P 500, (b) the early stages of the 2007-2009 bear market, and (c) the early stages of the 2000-2002 bear market.

Notice in all three cases (2011, 2008, 2001):

  1. The slope of the 200-day moving average begins to roll over.
  2. The 100-day tends to stay below the 200-day.
  3. Price tends to stay below the 200-day.

Until the present day chart of the S&P 500 improves, the odds continue to favor lower lows, and rallies should be viewed with a healthy dose of skepticism.

While the chart below looks busy and complex, the takeaways are easy to understand. The top portion of the graph shows a measure of market breadth, the percent of S&P 500 stocks above their 200-day moving average. The 200-day is often used as a bull/bear demarcation line. Broad participation in a market move (up or down) tends to confirm the move in the index. Bearish divergences occur on charts when the S&P 500 makes a higher low (see green lines at the bottom of the chart), but the indicator makes a lower low, which indicates an increasing negative bias by investors. In 2006-2007, stocks made a higher low (bottom left) accompanied by a bearish divergence in breadth (top left). The bearish divergence in late 2007 said “be ready for the strong possibility of lower lows in stocks,” which is exactly what happened. A similar bearish divergence occurred between the summer 2010 low and the 2011 lows, which may foreshadow a move to new lows later in 2011 or early in 2012.

Even if stocks rally further, we believe the outcome will be similar to the spring of 2008 when all the gains were erased in relatively short-order. The bear rally off the March 2008 lows was clearly confirmed by market breadth as stocks and the indicator below both made higher highs.

While the 2008 breadth chart above is impressive, breadth in 2011 (below) looks hesitant and unsure. The chart below is not necessarily bearish, but it does show one significant difference between the spring of 2008 and 2011.

Just as we showed long-term bearish divergences between the S&P 500 and market breadth above, bearish divergences are also clearly evident on the weekly charts.

The chart below shows what happened after the divergence shown above; stocks continued to follow the primary trend (down).

A similar and ominous bearish divergence occurred between the summer 2010 lows and recent 2011 lows. This divergence may foreshadow more pain for stock investors in the coming weeks and months. Bearish divergences on a weekly chart need to be respected, as they can be powerful signals. Do all bearish divergences lead to new lows? No, it is possible stocks go on to make higher highs, but it is a lower probability outcome, especially given the current fundamental and technical state of the financial markets.

Ciovacco Capital Management

    Copyright (C) 2011 Ciovacco Capital Management, LLC All Rights Reserved.

    Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com

    Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. As a registered investment advisor, CCM helps individual investors, large & small; achieve improved investment results via independent research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions. When looking at money managers in Atlanta, take a hard look at CCM.

    All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.

    Chris Ciovacco Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in