…to buy when everything looked it’s worse. And for as right as I was to be a bear on the way down, I’ve been equally wrong to remain bearish during this recent rally. But when I look back over the last 5 weeks, I do feel as though I’ve learned what to look for in a bear market rally (and to be clear I’m still in that camp) and will be better prepared next time to take advantage of a move such as we’ve seen as of late.

If I had to pin my folly on any one thing it would be not following my market timing system that gave me a buy on the markets on March 11. At that time I remember blogging about getting a buy signal on the markets and how everytime over the past few months when I got that signal, days later it would reverse and turn lower. I guess I was trying to outsmart my own system, anticipating a reversal which didn’t come. This was a classic “this time it’s different” mistake that I surely will not make next time I get a buy/sell signal on the markets.

Now, having said that, lets assume I had gone long and stayed long for the duration of this rally, as I have yet to receive a sell signal on the markets. Where would I be right now aside from considerably more wealthier.

From bear market lows:          Dow up 25%        Nasday up 31%           S&P up 29%

We know from studying past bear market rallies from the 29′-32′ years that the average bear market rally is 33%. So you can see that today’s rally really isn’t anything special, it just feels special because it’s been awhile since we’ve seen so much green on our watchlists. Secondly, if you’ve missed out on much of it like myself, then your mind can add even more significance to it. And lastly, if you are somebody who watches CNBC or any other media out there you’re probably fully invested right now because they’ve pointed out every reason out there why this is a new bull market.

But if you step back and look at the recent gains, I would think the risk of the markets pulling soon is significant and the bulls are pushing their luck holding onto longs. So with as special as this rally has been, it still isn’t higher than the average bear market rally from the Great Depression era.

“It is what it is till it isn’t”

Many chartists will agree that the bulls live above the 200 ma and bears live below it. So right now, technically we are still in a bear market, and recent gains should be properly classified a bear market rally, until we cross that 200 ma. Given the rally we saw on Friday it’s surprising that we barely broke through the resistance seen below. It’s looking more tired to me than anything.


10 Min chart


Now the Nasdaq has been the shining star as of late and is up 31% from it’s lows, but as you can see is sitting right at resistance. There are going to be a lot of investors who have been sitting on the sidelines, reading this weekends financial section feel like they are missing out. They’ll probably call their broker and want to get in Monday morning, and that could be a huge trap.

And while I remain in the bear camp, there is one bullish scenario above I want to point out is that we could be forming a head/shoulders bottom on the Nasdaq with the right shoulder yet to be formed. But notice, both scenarios of mine involve the market moving lower over the next few weeks, so be careful not to get to over-exuberant on the long side next week.