Was that the Shortest Bear Market in History?

The bulk of the evidence remains bearish and this means bounces are expected to fail at some point. Picking that point is, of course, a whole other ball game. Keep in mind that the S&P 500 fell some 33% from February 19th to March 23rd and hit a 52-week low on March 23rd. This was a huge move that seriously stretched the rubber band and paved the way for an oversold bounce. The further you stretch a rubber band, the harder it pops back, and hurts.

With today’s surge, the S&P 500 is up some 20% from its closing low. A close above 2700 today would sustain this gain and we would be back in a bull market, for those using the standard definitions (bear market = 20% gain and bull market = 20% loss). This would make it the shortest bear market in history. Of course, we could then see the shortest bull market in history follow the shortest bear market. One this is for sure: volatility is in the stratosphere.

Putting 20% Bounces into Perspective

At this point, I remain in the bear market camp for the same reasons. The S&P 500 is still well below its 200-day SMA and the 20-day SMA is well below the 200-day SMA. Further more, all nine breadth indicators are still on active bearish signals and they are not going to turn majority bullish with today’s move. In fact, even the 10-day EMAs of Advance-Decline Percent are still well short of bullish signals and we do not have a bullish breadth thrust.

As the chart below shows, there were three 20% advances during the 2001-2002 bear market (green zigzags). Furthermore, we also saw two 20% advances in 2008. Click here for a detailed article studying prior bear markets.

The chart above was created with Optuma.

RSI Hits the Danger Zone

SPY hit the first danger zone last week and fell over 4% on April 1st (Wednesday). The ETF immediately firmed and then gapped up some 4% on Monday. There was follow through to this gap with a strong close and another gap on Tuesday. Even though this 11 day surge is impressive on its own, I am cautious as SPY nears the 50% retracement.

I do not use Elliott Wave, but some of it jibes with Dow Theory. The decline from February 19th to March 23rd is Wave 1 and the current bounce is Wave 2. In Dow Theory terms, Wave 1 is part of the primary trend and Wave 2 is a secondary bounce. Elliott theorized that corrective (secondary) waves often form an ABC zigzag pattern with three legs (A, B and C) and usually fall short of the 61.8% retracement line. Elliott Wave is subjective, but I will consider this a bear market bounce as long as the weight of the evidence is bearish. With SPY nearing the 50% retracement line, this bounce could run out of steam soon.

The indicator windows show RSI(10) and RSI(14) moving above 50 and into their danger zones. The 40-50 zone marks momentum support when the bigger trend is up. This is the opportunity pullback within a bigger uptrend. Taking the reverse, the 50-60 zone marks momentum resistance when the bigger trend is down. This is where the bounce could fail.

I am often asked why I use RSI(10) instead of RSI(14). It is really just a question of personal preference. RSI(10) is a little more sensitive and becomes overbought/oversold (30/70) more often than RSI(14). As you can see from the chart above, the line shapes are the same. Only the RSI ranges are different. RSI(10) oscillates in a slightly wider range. One simply needs to adjust the levels to generate similar signals.

I highlighted examples with the blue annotations. First, RSI(10) dipped below 30 to become oversold in early October and RSI(14) dipped below 40 to become mildly oversold. Second, RSI (10) bounced off the 40-50 zone in early December, but RSI(14) did not dip below 50. Third, RSI (10) dipped below 40, but RSI(14) held the 40-50 zone in early February. I would suggest picking a timeframe, sticking with it and learning how it works.

%Above 20-day EMA Exceeds 50%

The %Above 200-day EMA and %Above 50-day EMA are used to define the overall trend, while the %Above 20-day EMA is used to identify mean-reversion setups. %Above 200-day triggers bullish with a move above 60% and bearish with a move below 40%. %Above 50-day EMA triggers bullish with a move above 80% and bearish with a move below 20%. A move above 80% shows exceptional underlying strength because suddenly 80% or more of stocks in the S&P 500 are above their 50-day EMAs. Conversely, a move below 20% shows exceptional underlying weakness because fewer than 20% are above their 50-day EMAs. As the red zones show, both indicators are bearish right now.

With the trend indicators bearish, this means I favor bearish setups and short-term overbought conditions. %Above 20-day EMA moved above 80% in early November and early December 2018 for a pair of overbought readings that worked out well. The indicator moved above 50% on Monday and I consider this a danger zone. Technically, a reading above 80% is needed to be short-term overbought. However, bear markets are tricky and anything above 50% is a danger zone for this indicator.

Thanks for tuning in and stay safe!

-Arthur Hill, CMT
Choose a Strategy, Develop a Plan and Follow a Process

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