After a whopping 25% gain from the October low to the recent April high, the stock market certainly needed to digest that bullish feast. But how do we know if it was a healthy pullback or the first sign of the next major bear market?
When considering the long-term stock market cycle, we look for strong long term sell offs before the bear market ensues.
In the "roaring 90s" we had a major sharp correction in 1997 due to the Asian economic crisis. After the 1998 Russian financial crisis, most stocks started trading lower, which set the stage for the bear market of the early 21st century.
Then, after the 2002 bear market bottom, the new bull market began. It wasn't until 2006 when we got the first strong pullback, which people at the time wondered whether or not it was simply a correction. In early 2007 we got another sharp sell off, which was followed by some more upside before the market topped out in July and October.
This happens to individual stocks, too. And it happens to indices or stocks on short-term time frames as well. A stock may make a 1-month advance from $15 - $20. But on the way up, in week-3, you might see a swift 10% correction (where a bunch of large traders exited most of their stock) before the stock makes one final push up to $20. Then the bearish reversal happens.
It's like the Native Americans hunting buffalo. Chances are, the first arrow won't take the buffalo down. It takes a few hits!
The question today is: Was this recent decline from the summer of 2011 down to the October, 2011 low that first initial blow to the bullish trend before the market makes one more go at it to break the April highs?
Look at the chart below. You can see that we just retraced 50% of the 25% move from low to high. A 50% retracement in considered to be a healthy retracement before the market moves higher again.
Presidential election years are typically strong years for the stock market. And the following years are when most bear markets start and end. Those next two years are also when many international conflicts have typically begun.
It seems like we have the Fed (and most global central banks) working in favor of the bull trend for the stock market leading up to the U.S. presidential election. We may be in for a continued bullish ride through the end of the year.
In the chart above, you can see that we just penetrated the major down trend line that is formed by connecting the April and May highs. In past Tycoon Reports, I discussed that trend line as one that would offer resistance before being penetrated -- and that's exactly what happened.
Now that we are firmly above that trend line, it's likely we are going to push up to the April highs and break them, after some initial resistance.
I don't know if that means we are doing that last dance before entering the next bear market. But it seems to me that this market is being pumped up, or "fattened up for the kill" like we said it was in our December 2006 report: "Tycoon's 7 for 07".
But for now we continue to ride the bullish wave. Students of my Technical Analysis Millionaire program will have no problem spotting the top when it comes, and shifting back to profiting from bearish positions.
See you next Tuesday.
Chief Investment Officer
Technical Analysis Millionaire