Upside within a bear market

Allow me to introduce you to the main concept of my new book, Sideways: Using the Power of Technical Analysis to Profit in Uncertain Times. I will apply this concept of “Market Phases” to what I see is happening on the markets right now. I am hopeful that the book will be for sale on Amazon and Chapters sometime this week–and will add a link to my blog as soon as its available.

The basic premise of Sideways is that markets move through 4 phases. These phases can be observed in every time frame–from huge multi-year patterns right down to intra-day patterns. The phases of the market are:

1. Basing (the bottoming process),
2. Bullish (strong uptrend),
3. Topping (a self explanatory term!), and
4. Bearish (downtrend).

You can observe these phases on a longer termed chart, and then observe shorter-termed phases occurring within each of the longer tiem framed individual phases. My book goes on to introduce techniques that you can utilize to identify which phase we are currently in for the appropriate timeframe of your trading strategy. For example, there are specific chart patterns that uniquely occur in each phase. Basing and bottom patterns such as double-bottoms, head & shoulder bottoms etc identify phase 1, continuation patterns like flags and pennants help you identify phase 2 bull markets and phase 4 bear markets, and topping patterns such as expanding formations, diamonds or double tops etc identify the phase 2 topping stage. I further introduce how to use “backup” tools such as moving averages, sentiment indicators, seasonal cycles, breadth, momentum oscillators and even some fundamental tools that can help you confirm your observations.

Lets take a look at what’s happening right now, in context of these phases. By the way, I will be speaking about these observations at the Vancouver Moneyshow at the Vancouver Conference Centre East on Tuesday September 20th at 9:30 am. Please note that my blog will be posted mid-week next week due to my absence to be at the Moneyshow.

I’ve posted a chart from my MoneyShow appearance in Toronto this weekend below–click on it to enlarge and see the details. This chart shows that the S&P completed a head and shoulders bottom in early 2009 to complete a phase 1 bottom. From there, the market entered into a phase 2 bullish trend with few interruptions (a continuation rectangle last summer didn’t break the trendline). This summer, another rectangular trading pattern emerged. The breakdown through the floor of the pattern in early August suggests that this rectangular pattern was a phase 3 top. Currently, we are likely in a phase 4 bear market. However, the recent consolidation pattern by the S&P 500 ( between 1120 – 1220 as mentioned last week) combined with the upcoming traditional seasonal strength over the winter months leads me to believe that – after much up/down madness over September –  there could be a breakout from this consolidation pattern and winter rally into the former support level of 1240. My maximum target over the winter for the markets would be into the middle of the summer’s trading range. I would be less optimistic about the markets after a winter rally, given my belief in the bigger “phase 4” bear market picture. I would expect that this winter may provide an upside trading opportunity within the context of a bear market. Time, as always, will tell if this will be the case.