Tuesday, August 23, 2011
It's too early to give up on the bull market.
Yes, all the major averages are down sharply from their April highs, and much of the damage occurred in just the past month. But you can't call it a bear market yet – at least not until the end of the month.
You see, the difference between a bull market and a bear market is just a thin, blue line.
Take a look at the following monthly chart of the S&P 500, plotted against its 20-month exponential moving average (EMA)...
You've seen this chart before. I use it to define bull and bear markets. It's simple to read. If the S&P 500 is trading above its 20-month EMA (the thin, blue line), we're in a bull market. But if the index trades below the line, the bear is in charge.
According to this chart, we're in bear market.
But... not so fast. The market is never that easy to read. Keep in mind... this is a monthly chart. So all that matters is how the S&P closes at the end of the month. Right now, the chart reads bearish. But if the S&P can somehow miraculously rally and close above 1,213 by the end of August, it will erase the breach of the line and the bull will regain control.
It would be just like the stock market to throw us that sort of curveball...
I know the odds are against it. But this week, I'll put my money on the bull. It's too easy to call this a bear market – and too many people are doing just that. So it's time for a strong, counter-trend rally to muddy the waters a bit.
Take another look at the previous chart and notice the action back in August 2000, when we entered a bear market. You can see the breach of the line and the snapback rally that pushed the S&P up to test the breakdown level. The same thing happened in early 2008, just as that bear market was kicking off.
This is important, because even if the market doesn't rally back to the 20-month EMA right now, it will rally at some point. It's normal for prices to come back and test breakdown levels. So we'll likely see the S&P 500 come back over 1,200 at some point.
I'm betting it happens sooner rather than later.
If it happens by the end of the month, the bull will continue to run. You'll want to use any weakness in September as a chance to buy stocks. But if stocks can't rally between now and the end of the month, the bear is back in charge.
Either way, the next seven trading days will determine the market's fate. Keep a close watch on the markets.
Best regard and good trading,
If you're not convinced stocks will move higher soon, Jeff has even more proof for you. No one's talking about his theory now... Everyone's bearish. And from a contrarian standpoint, that means it's time to buy. Read more here: Buy Stocks Now.
"I have a little ray of sunshine in all this darkness lately," Steve tells us. "You could make a lot of money in the next three months... based on history." See why he agrees this is the perfect time to buy here: History Says to BUY Stocks Now.