- New Science in old markets -

The bear market in equities

As we have been writing lately, the break downward of weekly-scale compressions in mainly US and European equity indices is a strong sign that more weakness will happen. We have been seeing daily-scale bottom extensions too, so an equity market bounce has also been likely and prices have indeed already rallied a few percent from the lows made in the middle of  last week. This current rally may persist all the way up to the important resistance about 5 or 6% above here but a trading range with a lower ceiling is more probable - this is what usually happens when weekly and daily signals point in opposite directions. We will publish more detail on the various points to monitor in the next few days.

We measure sentiment and mood in our work but another point to consider is that unmeasured sentiment has also turned very negative. Newspapers, blogs and other comments have all been focussed on the negative underlying situation in world markets. Perhaps the most telling sign is that the BBC in the UK and the equivalent media in France usually ignore market stories as being only of interest to capitalist exploiters. Recently even these socialist organs have been carrying items about the fall of equity markets and the poor outlook. It is hard for markets to fall while bearishness is so widespread - prices can fall when the crowd is so bearish but they probably can't fall yet.

So, we will be trying to find rally peaks on which to re-sell but we may also try to find places from which prices may rally within the range that we think is forming. This range might last a while but we will comment further once we see how it develops. In the meantime, some hints about how to deal with the situation.

In a bear market, all news is bad.

News moves markets when there is no prevailing mood. Bullish developments cause rallies, bearish ones cause drops. This is the 'normal' operation of markets as they discount the unfolding story. When a bear market arrives, this changes. Apparently positive news is re-examined for negative flaws and they are treated as a reason to sell. Rallies happen but they fail.

Bear market rallies can be fierce.

When prices do rise in a downtrend, the strength of the rally can be disconcerting. Be very careful to position short-sales carefully so as to minimise the risk of being caught in one of these updrafts.

Bear markets can spend long periods going sideways or upwards.

When drops happen they can last a few days or even one day only. The size of the move can be substantial but if you are not short at the beginning (or before) then it can be very hard to sell into the weakness once it has already begun.  Timing is always important in markets but the timing of short-sales in a bear market is particularly vital.

Here is an update of the most recent weekly compression signal and the market movement that pushed below it - it is in a  Nasdaq index and the first point of resistance will be at the low point of that compression - at 4255 or just above Friday's close. We are not technical analysts but the channel that appears on this chart may help define what happens next - it is common for channels to separate into two roughly equal parts so we have drawn a middle dotted line which should count as the next resistance point - around 4400 or 3.5% above here.

Nasda weekly comp brk2