Saturday, March 1, 2008

I Have Posted This Before But Always Worth Reposting

Primary Bear Market
Stage 1. Distribution Just as accumulation is the hallmark of the first stage of a primary bull market, distribution marks the beginning of a bear market. As the "smart money" begins to realise that business conditions are not quite as good as once thought, and thus they begin to sell stock. There is little in the headlines to indicate a bear market is at hand and general business conditions remain good. However stocks begin to lose their lustre and the decline begins to take hand. After a moderate decline, there is a reaction rally that retraces a portion of the decline. Hamilton noted that reaction rallies during a bear market were quite swift and sharp . This quick and sudden movement would invigorate the bulls to proclaim the bull market alive and well. However the reaction high of the secondary move would form and be lower than the previous high. After making a lower high, a break below the previous low, would confirm that this was the second stage of a bear market.
Stage 2. Movement With Strength As with the primary bull market stage two of a primary bear market provides the largest move. This is when the trend has been identified as down and business conditions begin to deteriorate. Earnings estimates are reduced, shortfalls occur, profit margins shrink and revenues fall.
Stage 3. Despair At the final stage of a bear market all hope is lost and stocks are frowned upon. Valuations are low, but the selling continues as participants seek to sell no matter what. The news from corporate America is bad, the economic outlook is bleak and no buyers are to be found. The market will continue to decline until all the bad news is fully priced into the stocks. Once stocks fully reflect the worst possible outcome, the cycle begins again.


Market Monk said...

Excellent post Stewie. I decided a while back that I would trade the market as opposed to individual stocks. So I trade the Futures as well as ETFs (including leveraged ones).

Anyway, I have created a few posts that deal with market bottoms. IMHO the bottoming process can be identified and consists on looking at many things, one such data point is the number of lows being made. When that number series makes a higher high (less stocks making new lows) and forms a positive divergence the chances of the bottom being formed increases.

I am looking forward to putting that theory to test and getting long with 2X ETFs, lol.

Keep putting up these excellent charts dude!


Stewie said...

MM, I post to put a smile on your face. thanks for the support.

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