Tuesday, July 22nd, 2008
How to tell a new bull market from a bear rally
A new rally always gives hope that his is the start of a new bull market. But how do we tell the difference between a bear-market rally and a real bull market?
I’ve written a brief outline of things I look out for below. Using this list actually requires sitting out the initial part of the rally to allow its true nature to be revealed.
1. Volume, volume, volume
A big surge on higher volume at the start of a rally isn’t enough. I want to see strong rises on big volume on an ongoing basis, which suggests fund managers are accumulating stocks.
2. Breadth
I want to see a lot of stocks – in an uptrend – participating in the move. The best indicator is a rally led by new 52-week highs. That’s very different from a rally led by a contraction of stocks making 52-week lows.
3. Leading stocks
A rally led by beaten down stocks – like financials and consumer companies – doesn’t impress me. I want to see strong sectors lead the running.
This is perhaps the best indicator of all. If there aren’t momentum/aggressive growth stocks in leading sectors setting up bases and breaking out to new highs, then it is likely to be a bear rally.
4. A new uptrend
A bull market will start when the market makes a new uptrend: a series of higher highs and higher lows.
5. Moving averages turning up
Strong bull moves see the 50-week moving average turning up, as well as the weekly and monthly MACD.
6. Sentiment
Most people – particularly your mates – should have lost interest in getting rich in the share market when a new bull market begins. If they’re all talking about rallies and bounces, not enough people have been shaken out and another down leg is likely.
This entry was posted on Tuesday, July 22nd, 2008 at 1:54 am and is filed under Bear markets, Market direction. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
