The Charts Make Clear - The Bear Market Is Not Over

After three days of sharp gains, the Dow Jones Industrial Average remained in bear-market territory, 24% below its all-time intraday high. Investors haven't seen the last of the declines, and the charts show why.
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On Thursday, Fox Business proclaimed that the bear market for stocks was over. The  reason: the 20% three-day rise in the Dow Jones Industrial Average. 

The report was wrong.

The Dow industrials ended Thursday still in bear-market territory, 24% below their all-time intraday high of 29,568.57, set on Feb. 12. And today the major averages are slumping again.

Analyzing the weekly charts that track the Dow 30, the S&P 500 and the Nasdaq 100 will show why the Fox Business call was premature. 

These charts are for the SPDR Dow Jones Industrial Average ETF (known as Diamonds)  (DIA) - Get Report, the SPDR S&P 500 ETF Trust (or Spiders)  (SPY) - Get Report, and the PowerShares QQQ Trust ETF Series 1 (or QQQs)  (QQQ) - Get Report.

Let’s start with the monthly chart for Diamonds

The Monthly Chart For Diamonds

The Monthly Chart For Diamonds

Courtesy of Refinitiv XENITH

This chart shows monthly bars going back to the end of 2006. 

Note that the bear-market decline of 2008 put the ETF below is 120-month simple moving average (in green). 

Then came the March 2009 V-shaped bottom. I called that bottom on Fox Business and 88% of viewers disagreed with me. That made me more bullish. 

Next, note how the 120-month SMA provided a huge buying opportunity in fourth-quarter 2011. 

The crash of March 2020 stayed above this key moving average at $180.25, which was a sign of a tradeable bottom.

This chart does not look anything like the end of a bear market.

There is a potential bullish sign that could be confirmed today. It’s called a weekly key reversal.

What’s a weekly key reversal? Closes above last week’s high would be weekly key reversals. This may be bullish, but the bear market remains. 

Weekly key reversals occur with closes on Friday above $218.31 on Diamonds, $256.90 on Spiders and $184.68 on QQQs.

Let’s Study the Weekly Charts

These charts show weekly bars going back five years.

The horizontal lines represent value levels and risky levels from my proprietary analytics.

The red line trading through the price bars is the five-week modified moving average.

The bold green line is the 200-week simple moving average, which I consider the technical reversion to the mean.

The study along the bottom of the chart is the 12x3x3 weekly slow stochastic readings, which scale from 0 to 100. 

A reading above 80 is overbought. A reading above 90 identifies an inflating parabolic bubble formation. 

A reading below 20 is oversold. A reading below 10 identifies a too-cheap-to-ignore formation.

The Weekly Chart for Diamonds

Weekly Chart For Diamonds

Weekly Chart For Diamonds

Courtesy of Refinitiv XENITH

The weekly chart for Diamonds is negative, with the ETF below its five-week modified moving average at $245.48. 

The ETF is also below its 200-week simple moving average, or reversion to the mean, at $236.30.

The 12x3x3 weekly slow stochastic reading is projected to decline to 31.45 this week from 37.8 on March 20. 

In mid-January this reading was above the 90 threshold, putting Diamonds in an inflating parabolic bubble formation. 

 This bubble popped with the ETF 23.9% below the high. The ETF is up 18.8% from its March 18 low of $189.67, not up more than 20%.

The Weekly Chart for Spiders

The Weekly Chart For Spiders

The Weekly Chart For Spiders

courtesy of Refinitiv XENITH

The weekly chart for Spiders is negative, with the ETF below its five-week modified moving average at $284.05. 

The ETF is below its also 200-week simple moving average, or reversion to the mean, at $264.02.

The 12x3x3 weekly slow stochastic reading is projected to slip to 32.61 this week from 39.98 on March 20. 

This reading was above 90 during the week of Jan. 24 in an inflating parabolic bubble formation. 

The ETF is down 23% from its all-time intraday high of $339.08 set on Feb. 19.

The Weekly Chart for QQQs

The Weekly Chart For QQQs

The Weekly Chart For QQQs

Courtesy of Refinitiv XENITH

The weekly chart for QQQs is negative, with the ETF below its five-week modified moving average at $200.50. 

This indicates risk to its 200-week simple moving average, or reversion to the mean, at $160.81, which has yet to be tested.

The 12x3x3 weekly slow stochastic reading is projected to decline to 35.14 this week from 42.59 on March 20. 

During the week of Feb. 14 this reading was above 90, which put the ETF in an inflating parabolic bubble formation.

This bubble has popped, with the ETF now 19.2% below its all-time intraday high of $237.47 set on Feb. 19.

How to use my value levels and risky levels:

The closes on Dec. 31, 2019, were inputs to my proprietary analytics. Quarterly, semiannual and annual levels remain on the charts. Each uses the last nine closes in these time horizons.

Monthly levels for March were established based on the Feb. 28 closes.

New weekly levels are calculated after the end of each week.

New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.

To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the past 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.