How To Identify Bull & Bear Market Trends

How To Identify Bull & Bear Market Trends

Summary

Bear markets are THE major problem for investors.

Bear markets can be deep and last for decades.

Simple technical indicators and rules can help you profit during both bull and bear markets.

About 60% more wealth could have been created during each of the last two bear markets using these simple rules.

By profiting in BOTH bull and bear markets, you can compound high returns over time.

undefined undefined/iStock via Getty Images A “bull market” in a financial asset means there is a rising price uptrend with higher highs and higher lows. Conversely, a “bear market” in a financial asset means there is a falling price downtrend with lower highs and lower lows. THE Major Problem For Investors

Bear markets are THE major problem for investors. If stocks and other financial assets were always in bull market uptrends, the life of an investor would be easy, stress-free and filled with unicorns and rainbows! But that is not the case, unfortunately.

In addition to causing huge losses and lots of stress, the damage from bear markets can last for decades. For example, it took the S&P 500 about 25 years to return to its 1929 peak. It took the NASDAQ about 15 years to return to its 2000 “tech bubble” peak. It took gold about 28 years to return to its 1980 peak. And the Japanese stock market is still about 35% below its 1989 peak, 32 years later — after having been down 80% 20 years after that peak (and this is despite a couple of decades of 0% interest rate policy)! Two or three decades of losses is more than most investors can handle emotionally or financially, particularly those approaching or in retirement.

But what can investors do about bear markets? Is there a solution to this critical problem?

Most Wall Street advisors will tell you to always stay fully invested in stocks “for the long run” (which keeps their fees flowing uninterrupted) since it is “impossible to time the market”.

They are right that it is impossible to “time the market” or consistently pick tops and bottoms. But they are wrong when they lead you to believe that you can’t make lots of money (or at least avoid huge losses) by learning how to identify the key indicators of bear markets and acting wisely on those indicators.

This is very important, since we see many factors that point to the next bear market being the worst since the Great Depression, as we discussed in this Seeking Alpha article . It is also very timely, given the weakness we’ve seen in global stock markets and most other “risk-on” assets so far this year, including Bitcoin, which we discussed in this Seeking Alpha article . Key Bull & Bear Market Technical Indicators

There are many technical indicators we follow that provide objective evidence that the stock market is in a bull or bear market trend, including breadth indicators such as advance-decline lines, new highs and lows, etc.

In addition to those indicators, which are extremely useful for identifying stock market trends, there is a very simple and proven technical tool that can be used to determine bull and bear market trends for any financial asset: simple moving averages .

A simple moving average is simply a line on a price chart that shows the average price for the asset over a given time period. It “moves” every trading day as a new day is added and the oldest day drops off. Moving averages are very useful for assessing trends because they smooth out the noise of daily price movements and help you see trends more clearly.

We like to focus on these key simple moving average time periods:

1. 20-day moving average (20-dma) — roughly one month of trading days to assess the short-term trend

2. 60-dma — roughly three months of trading days to assess the intermediate-term trend3. 250-dma — roughly 12 months of trading days to assess the long-term trendTo smooth out trends and reduce the risk of “head fakes”, we generally use the following technical rules to determine when a bull market uptrend is in place:1. price is above the 250-dma,2. 20-dma is above the 250-dma,3. 60-dma is above the 250-dma and4. slope of 250-dma is positive Conversely, we generally use the following technical rules to determine when a bear market downtrend is in place:1. price is below the 250-dma,2. 20-dma is below the 250-dma,3. 60-dma is below the 250-dma and4. slope of 250-dma is negative Now let’s see how these simple technical […]

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