Warning: Bear Activity By Anthony Trongone, PhD, CTA, CFP
When a market revisits its upper price boundaries, should traders be wary of another breakdown?
Where are many moving parts to an equities downturn. Most of them arrive unexpectedly in the form of economic surprises, political instability, or random shocks. Since they are not on our radar, they are beyond our control. This study, however, is not about these unforeseen factors; its emphasis is on the marketís ability to either push past or break down from previous resistance.
Given two unsuccessful attempts of Standard & Poorís Depositary Receipts exchange traded funds (ETFs), known as SPDRs or spiders (SPY), to break above a closing price of $160, will the third time finally be the charm? In Figure 1, you see the line chart of the spiders from its inception; it demonstrates former price resistance. More important, after retreating to previous support, its three-year price run is approaching this same upper boundary. As of April 30, 2012, it remains to be seen if it will break through this psychological barrier. If history repeats itself, another failure will produce a steep decline, pushing the spiders back down to its previous $80 price range.
With respect to the past, as we drift toward a price of $160 in the spiders, a cautionary stance is advisable because of its two previous failures. A break above this upper boundary is always a possibility, but this could offer less return in comparison to the risk of a sharp slide down to its lower boundary. Because of the previous downturns, most market technicians would refer to this repetitive bottom as support, circulating around the $80 mark.
My focus, however, would be on the upper boundary; most technicians consider the eight years between these two points as evidence of price resistance. But because the market is a dynamic entity, before arriving at any conclusions about the current trading environment, it is best to study the days before these past peaks for hints of another possible breakdown.
Strict market technicians do not make decisions from economic factors. They put their focus on the inner workings of those technical indicators, which they believe are at least partly responsible for producing a bearish market environment. Despite many moving parts, this investigation focuses on daily price swings along with trading volume as the primary culprits responsible for the onset of a bear market.