Bull vs Bear Market

One of my “Trade Rules” is that “A trend in motion stays in motion until clearly reversed” and “Look at long duration charts to set the context”. Another is “When one time scale is ‘confused’ or confusing, shift time scale.”

OK, rather than fret over Is it or Isn’t it a market top; I’m going to “When in doubt, follow the rules” and look at some other Time Scales and long duration trend.

This first graph is one I’ve never used before. (It will be followed by what I typically use). It shifts the Time Scale out to “All Data” at Bigcharts.com for SPY S&P 500 ETF and uses a ‘monthly’ granularity. (I usually stop at weekly). It has some benefit in showing the very long term behaviour of the markets. I’ve saved a copy of it, but this is a ‘live’ chart (even if it will only changes once / month).

SPY all data Monthly ticks

Bigcharts.com link

The Simple Moving Average stack is based on 6, 12, and 18 months, so 1/2 year, a year, and a year 1/2 for those lines. We’re not talking “Day Trade” here. This is “Long term investor” land with holdings kept for years at a time.

Notice that from 2003 to 2008, the price bars (and the skinny ‘tail’) does not pierce the 18 month line significantly. From 2009 to date, it does. Especially in October to November 2011. Clearly people are more skittish now, and market volatility ranges are higher. You can get a 30% “haircut” in a couple of months in one of those. So saying “the trend continues” does not mean “just sit on your assets” is the best strategy. Being prepared to be “out on the dip / buy back in” matters.

The “prior years” make a very clear “bull vs bear” statement with price over the SMA stack and the lines “in order”. Market tops and bottoms (inflection points) are clearly defined by an orderly “rollover” of the order of that Price / SMA stack. The last few years have been less orderly. The SMA stack and prices “weave” some times. (As I recall, those were market news panic events, like Greece, and EU / The Fed meetings and announcements of more money to be printed and shoved around to the banks.) Part of why I’m not so keen on “news driven markets”… nor “Government event driven markets”.

OK that means we need to be a bit more “flexible” in how this chart calls a change of trend to “Bear Market”. It can take a 2011 style Dip and still be a Bull Trend.

My read of it is that we are in a Bull Market Trend Context. “Trade Rules” say the bias is to be “in the market” then, only out for tactical trade reasons (stop loss out, buy the dip, on a faster chart). So that’s what the bias must be. Bias is Be In.

Shift down to the ADX / DMI indicator. Notice that “Red On Top” pretty much identifies Bear Markets and “Blue On Top” is fairly good for “Bull Markets”. We are now clearly “Blue On Top”. There are a couple of notes on timing. This is a slow indicator and one a very slow chart. If you look at the 2011 dip, waiting for ‘red on top’ gets you out, about 1/3 to 1/2 down. Then waiting for ‘blue on top’ to get back in, puts you back in about where you got out. It would be better to use a faster chart for making enter / exit decisions on a tactical basis; or use trade rules like stop loss at 10% and buy back on bottom indicate / reversal or ‘buy if touched’ orders.

Notice, too, that DMI+ the blue line, only reaches about 30 once, at the major market top, then inflects downward at the top. We now have DMI+ approaching but not at 30, and not yet inflected down. “Be in but be cautious and ready to exit” is what it says to me. That 2011 ‘dip’ is timed well by the DMI+ inflection downward, from about the present value.

The price bars themselves have a different character than on faster charts. There, volatility (height of the bar, length of tails) gets lower in the lead up to a top. Here, there are narrow price bars during consistent run times, then the volatility over the month span starts to rise approaching a top. (Falling markets are very wide range price bars). The present size of the price bars looks somewhat like those near the top of 2007 early 2008. It also looks like those just in front of the last three ‘dips’ of recent years. Again, a “be ready to jump out” tactical indicate. Bias in, nervous quick exit tactics.

RSI is pretty clear. At 20, it’s a clear buy. At 80, a clear exit ( and gave a good ‘several month’ early warn before the ‘lower high’ of RSI in about October / November 2007 confirms the “run for the hills” to follow). We are now approaching 80 at about 70. That implies we’ve got about a year to go, based on past patterns.

On this time scale, MACD is much harder to use. It lags, so you need to look for inflections more. OK, with that, it is presently “blue on top” and looks a lot like the mid point of the basically bull market leading into 2007. It is also “above zero”. Both say “Be In”. You can see that changes from Bull to Bear and back again are indicated by a hard inflection of the blue line. Then you get the “crossover” and what I cal “Mouth Up” or “Mouth Down”. The space between the blue and red lines has a steep angle in one direction or the other. For trading purposes, it would be better to use a faster chart with MACD, but here it can act as a confirming indicator.

So, all in all, “Bull Market Bias, be in, late stage, be ready to exit fast” and “probably 6 months to a year to go” (though given Uncle Ben on The Fed Gas Pedal, exact timing likely to depend on what he decides…)

OK, same ticker and time scale, different indicators. Volume+ is a bit hard to use at this scale since sales volumes build over the life of the Fund. So we need to mentally correct out a growing slope in volume. Williams %R is very useful in prior years, but the more violent recent movements makes it more choppy. Still of use, though. And Momentum (or the closely related and a bit faster ROC Rate Of Change) is also useful. I’ve also put Bollinger Bands on the prices. Price tends to track the Bollenger Band during trends, and pulls away from it at inflections. We are presently tracking the Bollinger Band. Indication to ‘be in’.

SPY all data Monthly W%R ROC Volume+

Same chart at BigCharts.com

Williams %R made clear “above” or “below” calls in prior years. Lately, it has been a bit more ‘nervous’. Instead of being an ‘in /out’ indicator it better for marking “touched -80 buy the dip now” timing. Clearly, too, it can change behaviour. Presently well above the midline. At zero, so not a good ‘buy the dip’ time, more a ‘prepare to exit when the dip starts’. But during the prior Bull Market, it gave nervous little down ticks on not much of a ‘dip’…

Clearly volume peaks at market bottom / crash points. Harder to see is that i thins out toward tops.

Volume+ spike inflections give a pretty good ‘buy the dip’ indication. Yet right now we are at very low volumes. Prior volume lows tended to come a couple of months before their “dips”, so we likely have another couple of months. “Sell in May and Go Away” time is coming about then…

Finally, ROC. I used it instead of Momentum since it is just a bit faster. On this time scale, the ‘extra twitchy’ that it has is not an issue (at very fast time scales, Mo can be more stable). Look at inflection points in the ROC bars. Above zero is ‘be in’ while below zero is ‘be out’. Yet the inflection points give a ‘heads up’ a bit ahead of the indicate and in recent ‘buy the dips’ the touch of zero from above has been a good ‘buy now’ indication. We are presently above zero and not yet inflecting. “Be In”. Though with a bar value / height about like prior ‘peaks’ a month or two before an inflection / drop. So again, “be ready to leave in a hurry and soon”.

Here’s the chart I typically use for longer term trend. It’s a weekly tick mark chart, so a bit more ‘fast’. The indicators are harder to use for long term ‘bias’ setting and it’s more for “trade trend” than “Bull Bear Market” calling. Still, the SMA stack works well for that. RSI peaks are calling good ‘trade out’ moments the last few years (and buy back at the 50 line). DMI strongly ‘red on top’ is bear market time, while blue ‘inflections’ call trade exits well MACD above and below zero do a nice “Bull vs Bear” indication and inflections give decent Trend Trades (Bias set by other chart… so present bias would be ‘be long’ and trade out the dips, then back in as soon as possible. In bear markets bias is to be out, so ‘be short’ and cover shorts on rally times.)

Not how ‘dips’ tend to come once prices are just about as far from the SMA stack as we are now… Buy points at the lower SMA line touch / near and ‘protect’ when clear separation happens.

SPY all data WEEKLY chart RSI MACD DMI

DMI blue line near or at 30 does a pretty good ‘trade top near here’ indication. So it is saying ‘all fine for trend, but near a trade out moment’. MACD approaching 5 (for this ticker) and RSI approaching 80 say the same thing.

So you can see how a different time scale can give the same indications, but with slight changes in how the indicators are read.

MACD crossovers in the deep crash weeks are very clear ‘buy now’ indications.

Volume and volatility spikes give a similar ‘buy’ indication. (Harder to see is the low vol low vix -volatility index- topping action, but it is there.) Also note how vix puts a spike at the ROC down spike points; and that they come just a bit in advance of the best buy moment. You get a little bit of warning for exactly the bottom. Both vix and ROC go low during the long bull run, then just a bit wider as the top comes. (“Blowoff tops” have big run up days). Lately, it looks like volume hits minimums just a month or two before a top / peak. Then spikes up on the sell off. We are presently at very low volume, so “mark your calendar”…

SPY all data WEEKLY Vol+ Vix ROC

So all of this, right now, says to me that we ought to be bias toward being in stocks, but that the last ‘dip’ was a buy point, not now. We are likely approaching a “correction” in a month or two, so any trades need to be on a very fast chart basis. Swing trades or day trades, with protections in place. (Stop loss orders or, given the low volatility so low price for options, a ‘protective put’ behind long positions.)

Guess I ought to be looking up when the next Fed meeting happens and what’s going on in the EU with Greece, Italy, now France too, Spain, etc. and “Austerity”… Likely will be a news driven event when the time comes.
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