Signs Of Bear Market Rhyme With History


Simpler Trading Team

May 27th 2022  .  7 min read

In this article:

  • Bear market sings a bearish tune
  • ‘Canaries’ keep dropping
  • Is oil a safe haven?

Is there any rhyme or reason to this market?

Traders often need to check the rearview mirror before speeding along to the next trading setup. Past history may provide important information to help navigate the wild swings of this market.

Realizing this is a bear market environment, trading scenarios won’t play out like the bull run of the last decade.

This is why one of our traders hosted a free webinar with alerts about market direction.

(Check out the free video, above, for insight into trading this changing market.)

Market singing a bearish tune 

History doesn’t ever truly repeat itself, but current events often rhyme with events of the past – good or bad.

Much of trading involves reviewing historical data and trying to pinpoint when something will happen in the future that is similar to the past, i.e. market conditions ahead rhyme with market actions in the past.

During the bull run that began in 2009, the rhythm of the market kept a steady pace on the way to never-before-seen market heights. The run up was music to the ears of traders.

Now, this is a bear market and traders need to understand a down-trending environment because most traders today have not heard this tune. Often in the ears of traders, “bear” rhymes with “loss” or “risky” or “tough times.”

A specific definition of a bear market is when the broader stock market drops by 20% or more from previous highs. The major indexes – Dow, Nasdaq, S&P 500 – can separately dip into bear market territory. Recent lows in the indexes opened the door for the bears, but keep rallying higher just enough to stay “technically” above a bear market.

These relief rallies are expected in a bear market.

These rallies are similar to past bear markets which went through a downturn mixed with rallies higher. There was heavy chop at times and finally a bottom before the market shifted into an uptrend.

Knowing that this historical “rhyme” is sounding familiar is half the battle in trading what the market delivers.

Identifying bear market signals

What are some market signs that are singing this bearish song?

TG Watkins, Director of Stocks, shared during an “alert” webinar what he discovered when comparing current conditions to past bear markets.

For example, in the past bear markets dropped 20%, pushing away from the mean to the third average true range (ATR) marker. Recently, the S&P 500 did this again. Combine this with key signals in the moving averages and price points – where chart signals don’t show a sustained recovery – and the market appeared to be rhyming with previous downturns.

TG went further in his example, explaining how traders should be cautious of a “blow off top.” This occurs when price is trending and then does a “hockey stick” – a sharp turn in the opposite direction that on a trading chart looks like the outline of a hockey stick.

A blow off top can be tracked on a chart through a steep increase in volatility, volume, and price that eventually turns into a rapid and sharp drop in the opposite direction.

As in all trading, TG explained, there is no guarantee that these chart alerts are signaling a market crash. What these identifiers reveal is the continued “push into the nosebleed section” of pressure points in the market, mirrored by economic concerns such as housing prices and inflation.

All these signals indicate this market is primed for a big move… and bears appear to have the upper hand.

Scan for stocks during bear market

This wild market means price action moves quickly, and traders need an automated tool to track key stocks.

Stock scanners work within computer software to evaluate signals on a stock chart that follow specific targets set by the trader. Computers can track many companies around the clock and maintain a trading watchlist focused on a trader’s personalized setups and strategies.

This helps traders quickly disregard stocks they don’t want and concentrate on stocks with potential.

‘Safe’ options are limited in this market

Another market indicator TG is watching closely is oil. This may be the “canary in the coal mine” for when the market rolls over.

Some canaries already fell from their perches, i.e. consider recent major retailer earnings reports. Walmart and Target dropped 19.7% and 25%, respectively, on earnings.

TG pointed out that not since the 1987 market crash have retailers seen such sharp drops.

Earnings woes across companies focusing on consumer products come from changing behaviors. Consumers, hit by high inflation and wage concerns, aren’t spending as freely. Companies also can’t simply pass costs onto customers because consumers have tightened their wallets.

In a struggling bull market, companies such as retailers or home building – would be considered “safe” options for traders. But these safe havens are struggling, and may be early signals to a significant market drop.

Apple Watch (update): Another canary in danger?

Simpler’s traders have held that Apple (AAPL) may be another canary hanging on in a beary market. The assertion is that if Apple falls the market will spiral downward. Here’s action in Apple – Closed today at: 149.64. Apple grew from a pandemic low of 57.21 in March 2020, but is down from 182.01 since Jan. 1.

With a 4.08% gain today, Apple is sounding better compared to last week. Apple is a leader in the technology space and a high-value stock within the Dow, Nasdaq, and S&P 500.

Is oil a safe haven for traders?

Oil may be the last canary singing a positive tune, and the whole scenario of safe-haven companies faltering is rhyming with past bear markets.

TG sees oil as “comfortably safe” (relatively) in this market. And he says that with a slight grimace filled with caution.

TG, who digs into research at a deeper level than the average trader, sees a correlation between oil and the S&P 500 at the time of the 2000 market crash. (Yes, this was the dot-com bubble bursting, but there are always more views of the same market environment.)

At the turn of the century, oil peaked during the time the market was rolling over, TG showed. The market lost oil as a support (similar to the current last canary example) and then oil followed the market to a new bottom.

TG pointed out how the 2000 stock charts show the market “catching its breath” and chopping sideways before falling off a cliff.

Current conditions to consider are how the market flirted with a 20% across-the-board loss last week, and then rallied three consecutive days to close out this week.

Is this a relief rally that leads to a hockey stick move? Only time will tell, but these signals warrant caution and consideration for traders digging into the reason and rhyme of bear market conditions.

Sometimes traders need to hear “no”

Are there any places to “hide” in this market and wait out the expected sharp decline which may even be a crash?

The short answer, according to TG, is “no.”

Traders must learn to adapt to market conditions and change strategies if they want to find opportunities and trade what the market reveals. (Staying in cash and protecting capital is a strategy in an uncertain market.)

TG remains cautious to the long side and will continue to watch how oil is overbought and possibly unsustainable. He stands ready to adjust if the market moves quickly to the downside.

Tracking bear market ‘canaries’

Trading is risky, and can be a scary endeavor for anyone, especially in a bear market filled with uncertainty and volatility.

At Simpler Trading, TG Watkins offers his Moxie Indicator™ Mastery for traders who want to dive into market data, history, and possibilities. He offers a straight-forward, down-to-earth view of the market and how he is navigating through the often chaotic environment.

Learn more about TG and his mastery program where he delivers access to weekly interactive trading sessions geared specifically toward stocks. Follow TG in live-trading sessions during market hours, receive real-time trade alerts, and track a watchlist of stocks in his trade spreadsheet. Get started today!