Waiting for History to Repeat Itself

The markets got nasty last week, and there's no telling when things will get better. I'm getting ready for all the doom and gloom predictions, because the downturn will bring all the perma-bears out of their long slumber. But a little historical perspective is in order.

There's a big difference between a bear market decline and a bull market correction. During the early phase of the three-year downturn, selloffs looked just like the nerve-racking but short-lived pullbacks of the 1990s. Of course, the market didn't bounce back from the last dip, cascading lower and lower before printing a major low on Oct. 10 of last year.

Realistically, we won't know what kind of correction we're currently in until it's finally over. But my guess is that this will be the first in a series of bull market corrections until a final top is made sometime in the next one to two years. If I'm right, this selloff will present an outstanding buying opportunity at some point.

But how will we know when that golden moment arrives? Perhaps history can offer a few clues about what may happen in the next few weeks.

Let's look back at two vicious corrections in the mid-1990s and see how they finally yielded to much higher prices. This retrospection should be especially enlightening for those folks who have come into the markets since that time. They may not fully understand the emotional highs and lows these events can trigger in a very short time period.

I'm avoiding any discussion about the LTCM selloff on purpose. That nosedive is almost too scary to talk about, even to this day. Instead let's look at other corrections in 1996 and 1997, long before anyone could accuse Long Term Capital Management of trying to destroy world capitalism.

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Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. At the time of publication, Farley was long Trident Microsystems and Axcelis, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to [e-mail]. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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