Bear Market Rally – Three Drives To A High

One of the key parts of technical analysis is the repetition of patterns. This article will discuss the correlation of three momentum drives to a high during downtrends in the past. A bear market rally is difficult to identify. Below is one secret I’ve noticed and you might find helpful. Feel free to share the content with friends who might be interested.

April 2020

The current setup shows a big market compression of the February highs. As the market moved lower, we can see the PPO indicator moving up through the last week of the move down from March 16th to March 23.  The $SPX then goes on to rally 38.2% and pulls back. Now it has made another surge to get to the 50% level. The momentum peak (PPO) on the most recent high is less than the prior high.

What I want to watch over the coming days is if this momentum weakens and starts to go below the zero line. Why? This series of rising lows and rising highs on the momentum indicator (PPO)  is an important signal in my work.

2020 Market picture – 1 hour charts

2007-2009

Back in 2007-2009, We can see all these countertrend rallies on the PPO momentum trend. I watch for when they break the PPO uptrend and fall below zero. This can be an important clue of further weakness to come. Because the chart shows 15 months of data rather than the 4 months above, we can see a collection of uptrends during the 2007-2009 bear market.

I have marked the uptrends on the PPO’s in green. The point where the momentum moves back below zero is marked with vertical red lines. One exception shows in blue. There is a long multi-month PPO trend line (Black) that breaks at the end of 4 months. That marked the start of the serious decline. This is easy in hindsight, but the reality is harsher. The December 2008 period PPO had multiple dips below zero but no real uptrend on the PPO. The price action in December 2008 was similar. The current market price action looks similar to February 2008, August, October, December 2008. April 2020 shows the $SPX with a big move down, a 38-50% retracement, and we are watching for what is next.

2007-2009 bear market rallies

2002-2003

Another example is the 2002-2003 bear market. Our 60 minute data starts just before 9/11. If you look at the price and momentum action after 9/11, we don’t have the same momentum profile we have currently. The PPO went straight up, no real series of improving momentum. It was a straight thrust.

I try to form the trend lines on the PPO without looking at price.

As the market got more volatile, these momentum drives showed up. Be aware of the momentum (PPO) going back below zero in volatile markets. It is important to understand that the market can run to the downside after these PPO trends establish and break during bear markets.

One interesting exception. There is an uptrend of rising lows around December and early January that I did not mark. It is short and coincides with a trend line break on the actual price in the second week in January. There is no real setup in December that is similar that looks like the rest of these signals. I would catch the trend line break, but the change in PPO was not significant.

Because the chart below covers one year, it may look different that the current situation. To me it is very similar.

2002 bear market

Video link.

All that to say, it is an uptrend until it breaks. I would not be complacent if momentum fell below zero after this upthrust.
I also published a Market BUZZ video this week on this topic as well. The first part of this video covers this concept off.

 

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Good trading,
Greg Schnell, CMT, MFTA

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