Trading Lessons from past bear markets

Let’s be clear. I believe the index lows (S&P 500 and Nasdaq) have yet to happen. The current environment has all the makings of a bear market with more to go. And, like all traditional bear markets (aka: NOT the 2020 dip n’ rip), the market can decline, yet there will be tradable counter rallies.  Currently, the probability of a trade-able countertrend rally back to the 200 day SMA is very likely – in our view. At ValueTrend, we legged out of stocks during the late March rally and the following month, and now sit at 28% cash. We do plan on trading this rally. Today, I’d like to look at prior bear markets for clues on how to win while others are losing during this highly probable bear market environment.

Despite my call for a very neartermed tradable rally – we did NOT take the bait of last Friday’s rally. However, we feel its only a matter of days before we step in with near termed trading ideas. Have you taken my Online Technical Analysis Course? In it, I help you discover the proper ways to take advantage of market breakdowns, and then how to take advantage of the following market rallies with your cash. One way to trade these environments is NOT to get caught in a suckers rally. How do you avoid them? Well, there is no sure way. But you increase your odds SUBSTANTIALLY if you will follow my suggestions last week on this blog.

Key points on trading this potential rally

One way to trade this environment is to buy after a capitulation low by observing 3 days of upside follow-up. If you are like me, you might try to buy/spend one leg of your current cash the day after a washout day…. but only if if there is a key reversal signal such as hammer candlestick. You can also look for an event (Ukraine war, Fed announcement) that might put a temporary fire under the markets butt to send if forward. Again, see my course to understand the concept and timing behind legging into, or out of, a market.

Comparing bear markets

Lets take a look at the last true bear market…aka the 2008/9 bear market, and see if there are comparable patterns to today. The chart below is a daily chart.  It doesn’t show the prior bullish trendline and crack of the 200 day SMA that lead us into the bear. Its only looking at the bear trend of 2008/9. As such, the scale will be a little stretched compared to the following 2001 and current 2022 chart (which look more compressed in trend angles).

Anyhow, what you will see is my armchair EWT 3-wave bear market count (I am no EWT expert, so take it as it is…). More important than my wave count… I am trying to point out during that (roughly) 18 month bear, you had lots of opportunity to buy the dips, and trade out. Wash, rinse, repeat.

Of note, the dashed red line is the 200 day SMA. It did a great job of acting as a technical sell point for those rallies. Do be aware of the suckers rallies in late 2008 as the market exited its major meltdown phase leading to the Lehman collapse that October. One final washout in March of 2009 after that period of suckers rallies, and the market finally broke out that summer. Of note, ValueTrend followed our rules and sold the rallies, then bought the breakout that summer. See my recent book Smart Money/ Dumb Money for the strategy I employed during that crash, and how it helped ValueTrend recover and profit while others were losing.

2008 crash


2000-2001 crash

This is a weekly chart, but you will still get the idea here. Note the similar patterns of tradable rallies as with 2008. Note how the 200 day SMA (red line) is an excellent guide for selling those rallies. Finally, note the final sharp selloff in early 2002, followed by hammer formation signaling the bottom of that market in the summer of 2002.  Again: Wash, rinse, repeat.

Here’s the 2021-2022 chart

If we follow a similar pattern to 2008 and 2001 before that – we should see a counter rally soon (wave B?).  Then, a sharp final move down. Then a base should begin. To me, this neartermed rally looks about to happen – per the evidence in my last blog. I do think that it will be important to sell the rally at the 200 day SMA or near that level. It may be harder to trade a follow-up decline if it looks anything like the pattern during the fall of 2008. That is: sharp decline, then much chop/ head-fakes and hard-to-trade rallies.

The good news is that, because things happen so much quicker these days, we may see a shorter base period and a new bull market begin all by the end of this summer. That’s not a prediction. But its feasible. A good washout after a similar bear market patter of 2008 or 2001 will provide reason to become bullish again.




What I am looking for is a couple of rallies built after a couple of declines. We’ve had one rally in March of this year. Time for another easy one to trade to the 200 day SMA, I believe. That might fall around 4400 on the SPX. Then…I would love to see a very sharp decline finish the job, as it did in 2002 and 2009. Perhaps this summer?

As far as when its over (when the fat lady sings?): Watch for a base, or reversal candle patterns. Then a breakout. But that’s later. For now, we are facing a potentially tradable rally. That might be something that nimble investors try to take advantage of. I’m going to try to make some money on it. Those of you who are less aggressive, just hold cash. This entire bear market might be over in record time. As I said, things happen quickly these days.

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  • Apart from individual stocks I have an old mutual fund from my working days.
    The fund has 60% cash, 10% of it is break even but the other 30% is down 10%.
    The problem is the fund may charge 2% if I change funds in less than 30 days. Difficult to time a market bounce or just hold on for the ride?
    Any suggestions would be appreciated.

    • I cannot give individual investors advice Mark, but seems to me that a fund with 60% cash holdings is not going to be brutalized in the bear.
      Hard to say what things will look like in 30 days, but my money is that we see a bounce for now, then a resumption of the bear. But thats an educated guess, and nobody REALLY knows–so who’s to say?

  • On a new bull market which sector would be the new leaders or perform. Would you stick to materials , energy , metals , financials , or switch back to quality Teck .

    Tnx for your comments

    • Read my blog of today (May 18) for some long term ideas. From there, its a matter of watching the sector performance charts – per my lesson on doing that in the Online Technical Analysis Course. Take the course if have not already to learn to identify new rotational candidates.

  • Vickers reported today that insider buying has hit it’s highest level since the bottom in 2020. How much weight do you assign this signal?

  • Charts load for me…thanks for doing this regular blog. I find it super helpful to get me to look at things differently than I maybe am at the time.


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