What is a Bear Market ?

by TheWife

I have not had much chance to write lately and have sorely neglected this blog. I have openly shared my scheduling difficulties and I look forward to a time after my family gets settled in our new town to write more often.  I hope you will all forgive my lack thereof. But I do wish to broach this subject in light of current market conditions. 

I have recently been reminded of the definition of a bear market as one that has dropped more than 20% in price. Until that time, dropping prices are considered to be a bull market correction.   Until today, I considered this to be the true definition as well. But as I Google “define a bear market”, I find that the only thing  everyone agrees on is that a bear market occurs when securities drop in price, and I must concur. I began writing this post with the intention of stating that defining a bear market was rather unimportant but have come to realize that the definition is in the eye of the beholder.

If we wait to define a market that is trending down until it has dropped more than 20%, we are likely sitting in a pile of losses. As traders, we must be able to identify a downward trend as soon as possible and we must trade by what we see. Frankly, it doesn’t matter if indices drop 20% or only 10% or less, the trick is to not be caught long while it is happening. We must be objective in our analysis and avoid contrarian thinking in order to stave off the dreaded bull trap.

Currently we are in a distributive environment, a down-trend. We are below the 8 ema which I have learned to use with conviction. We have made a lower low, day over day, week over week and month over month. We have made a lower high, and we have lost the March low support level. We are dripping down in a chop that allows us to work off any oversold state. We gap down, then consolidate just as we would consolidate an uptrend in a bullish market, setting up for continuation in the same direction. We have knocked on the door of a pocket of volume that can take us down to the 200 SMA below 1280. Don’t just take my word for it; look at this chart and see for yourself.

I strongly urge traders to accept the trend and refrain from fighting it. If you are not comfortable on the short side, I understand, shorting can be difficult, especially in chop. There is nothing wrong with staying on the sidelines in cash.  A prudent trader would sit firmly on her hands in this distributive climate. Remember, “delays cost less than losses.”

Thanks for reading and good luck.

Read more http://thetradingwife.com/2012/05/14/what-is-a-bear-market/