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Thursday, January 30, 2014

Bull/bear market indicators

There are a number of ways to attempt to decide when the market is switching from bull to bear and back.  Nothing is perfect of course as they all have had false triggers.  I believe the commonly used 20% move up or down to be a completely stupid definitions of bull or bear markets.  If the move lasts a few months then reverses and old highs or lows are attained I would not call that a change of state myself.  History shows plenty of moves of that magnitude have been reversed. 

Here are a few methods that I know about.

1. 500 day SMA/100 week SMA.  These are approximately equivalent.  However, I prefer looking at the weekly chart using the weekly bars to confirm a break of the 100 SMA. 

2. Monthly 20 MA.   I don't know if the 20 SMA or EMA is preferred.  This is a popular method.  I like the 18 SMA and look for monthly price bars to confirm a break.

3. Monthly 13/34 EMA crosses.  This one is pretty simple to use.  Either the 13 EMA is above the 34 or not.  I have not studied this one very much as I had settled on numbers 1 and 2 before I ever heard of this method.  From what little I have looked at it though it does seem to be effective.

4. 50 day SMA/200 day SMA crosses.  This is more commonly known as the golden cross (50 crossing above 200) and death cross (50 crossing below 200).  This system has the most false crosses of any of the systems I have looked at.  The only way I would use this one to determine the bull/bear status of SPX would be if I had some reason to suspect the market is going to change states.

Deeper pullbacks in the market can cause these indicators to trigger bear markets falsely.  The false triggers have all happened when valuations were much lower then we have now.  With a bubble valuation on the Russell200 index we will likely be in a full blown bear market when any of the above methods trigger this time.  On the upside numbers 1-3 are extremely reliable signaling new bull markets.  There are very few instances where the market did not follow through at least somewhat.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.