Wednesday, September 16, 2015

Does TRAN Hold the Key to Determining if a New Bear Has Begun?

When does a bull market become "invincible" in the mind of investors?  It becomes invincible when every decline, no matter how scary or panic-driven, is ultimately bought back up to new highs.  At the point where a bull market is viewed as invincible, ma and pa investor (and everyone else) finally decide, "Hey, stocks are a SAFE investment for the long term!  Look at this, ma, another new high!  I done knew we shoulda bought us some of them equators!  Or equities, or whatever they's called."

Once a bull market is viewed as safe, never-ending, a permanently high plateau, etc., then it has finally sucked in every last buyer... and it's free to collapse.

The question people are still asking is, "Are we there yet?"  On August 31, I wrote the following:

The question everyone wants answered is:  Are we in a new bear market now?

The correct answer is that no one knows for sure.  All of us can speculate, though some folks tend to speculate more forcefully than others, sometimes pounding their fists on desks to drive home the point that their speculation is vastly superior to all others, and thus to be taken seriously.  But they're still speculating in the end.

The lingering question in my mind is whether this decline was a high degree fourth wave, or the start of a new bear. 

Later in the article, I drew the conclusion that more downside appeared reasonably likely, and thus that we could return to the "new bear, or bull correction?" question later.  Since then, the market has essentially traded sideways, thus flummoxing all attempts to to address the relevant conundrum.

Near the beginning of 2015, TRAN was one of the markets that helped me start looking down when most were still looking up -- hopefully it can function as well again now as a broader guide.  Heading forward, I think I'm going to use the Dow Jones Transportation Average (TRAN) as the long-term bull/bear waypoint, for the reasons outlined below. 

I must admit that, given the near-term patterns, it's become very tempting to start favoring the bull count.  Nevertheless, I'm going to refrain from doing so unless SPX can sustain a breakout over the 1994 zone.

The bull count is shown below.  To meet the qualifications of "sustained trade" in a breakout, the market can either break and run, or should demonstrate that resistance has become support in subsequent back-tests:

In conclusion, the near-term pattern has developed in a such a way that the bull count must be respected, but it must also be treated as suspect until 1994 is claimed.  Much as I do not believe news is a driver of the market, the actions of the Federal Reserve do not represent simple news per se, but instead represent liquidity -- and liquidity is indeed an important driver of the market.  Thus the pending Fed announcement will most likely allow the market to finally break from this month-long holding pattern.  Trade safe.

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