Tuesday, January 08, 2008

The Dow Jones and S&P 500 are in Bear Markets

A few months back I drew a line in the sand and suggested an area that if the markets moved below I would declare bear markets. Well, sadly the dow jones industrial average and the S&P 500 have closed below those levels with conviction and volume. Both major indexes have followed the small caps in establishing clear downtrends by making lower lows and having negatively sloped moving averages among other bearish indications like the crosses of death (50 dma crossing over the 200 dma).

I wouldn't go initiating short positions here because the markets are getting oversold and are due for a bounce, but any bounces should be shorted. Don't buy into this media hype about a 10% "correction," now that the primary trend is down any move to the upside is a correction. Holding stocks for the long term in this environment is a suckers game. I would suggest looking to enter shorts or add to existing positions when markets bounce back up to the 50 dma's which could happen as early as next week. The one saving grace for these indexes is that August lows have not yet been broken and may provide some support below in the near term. My guess is that they will be broken tomorrow, everyone panics, there will be alot of talk about our new bear market, then we see a power rally. That is what you want to wait for before selling longs and entering shorts, in my humble opinion.

Let me just say this one more time to be clear. It is risky to try and enter short positions here when the markets are oversold and are down significantly from recent levels, but we are now in a long term down trend now. That means sell on any strength.

Brain over at alpha trends makes some good points:

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