“Is the S&P in a correction or Bear market Mom?” is the question I received from my daughter last night. She’s been learning the stock market slowly over the last five or so years and I cringe at times with the questions she poses however no question is a bad question. I’d rather she come to me than blindly follow some pundit or supposed guru to $99/month subscription. After all, if he/she is so smart – why do they even need to charge for anything? Just sit back and enjoy the wealth.
While the big boys and their algorithms have their calculated strategy, this is how I explained it to her in my simple, 'laywomans' terms. In my mind big money typically buys at major supports during a correction. They sit back and salivate at an opportunity to, not buy the dip, buy buy on the cheap and define their risk.
For me, I consider the monthly 20 SMA as you can see from my prior post on the subject here.
If only a correction, one would want to see SPX bounce off of the 20month or (the line in the sand) the prior correction low to HOLD. If that prior correction low were to break, all bets are off as volume spikes and we’ve entered a Bear Market. Again, remember we're talking a monthly chart here and not a daily or weekly.
The ensuing Bear market sell off is wicked fast and generally lasts only a few months. Stock market bubbles and crisis'............well that's a horse of a different color. In a Bear market however you'll still see rallies. They are not a signal that all is well. Rallies are swift and sharp back up to resistance where you re-load your shorts and define risk above the 20month as your cover point. I've provided a few charts so you get the idea of my theory.
Are we in a Bear market now? No one knows Dorothy (ignore what they say on "entertainment" news television but if you want to dip a toe, I wouldn’t do it until we reach the 20month OR retrace 78.6% of the prior drop. I don’t need to catch a bottom……….but I also don’t need my face ripped off by volatility.
You will notice that I have two different 20month SMA's on the chart. One is based on the "close" and the other based on the "low" of the candle. Of course there are anomalies where the 20month did not hold such as the fear sell off in 2012 when Greece was rioting and there were concerns the taper. Operation Twist was magically announced and all was well. Regardless it is of note that the prior correction low was never violated. Fed to the rescue. No bear market.
This is important as you see an enormous volume spike as the prior correction low was taken out. Guess who had their stops there. Yep - big money. Now the 20month SMA (either based off the low or the close) has become resistance. Hang on to your hats.