Commentary: Charts show it could show up again in late 2010
NEW YORK (MarketWatch) -- They say that bottoms in the market are events while tops are processes. That means it takes time for the many parts of the stock market to roll over following a bull market, but they all travel together as bears bottom.
While I agree that cyclical bull and bear markets follow that rule, I have a hard time believing that a secular bear market -- in other words the real deal bear market -- is going to turn on a dime. This is something to which technical and fundamental analysts can agree.
So, while I do think the bear is over and a transition period is underway, I have pushed my expectations for the next bull market out to next year. Based on simple chart reading, it was not a difficult conclusion to reach.
Many analysts make comparisons to bear markets past. And while we can glean insights as to the psychology of the market at those times, we can be assured that no two bear markets end the same way. They all begin differently and for different fundamental reasons, too. But both tops and bottoms all have technical elements that do repeat.
Therefore, while we cannot match them up point for point, we can use previous bear market bottoms as rough guides to how the current one will form.
I have approached this analysis from two angles. The first is simply matching up the trends of the past two bear markets, and remarkably they are parallel. The massive twin 2000 and 2007 peaks in the Standard & Poor's 500 and sizes of the subsequent declines are certainly similar.
Using just this basic analysis of comparing the two trends, and then adding in support and resistance seen on both the 2002-2003 and 2008-present trading ranges, the time frame for declaring a healthy bull market is sometime in late 2010 (see Chart 1).
That is the point in time where the current trading range top runs into the trendline drawn from the 2007 peak. It is obviously a very simple analysis and does not really differentiate the speed of the two bear markets. But it does give us a framework for just how much work the market needs to do to heal itself.
Chart 1
There is more to be found in the 2002-2003 bottoming process and it relates back to the concept of gradual change in trend rather than a simple reversal.
Theoretically, the final big push down to bear market low territory occurs with panic. Prices move very quickly and internal measures such as market breadth and momentum swell to very high bearish levels.
Theoretically, the final big push down to bear market low territory occurs with panic. Prices move very quickly and internal measures such as market breadth and momentum swell to very high bearish levels.
Such a move is unsustainable for long and the market corrects higher before attempting its next push down to lower lows. What we observe is that the decline has a shallower trend and internals that are not quite as bad as the previous decline. This process can repeat a few more times before all is said and done.
The next chart shows the Dow Jones Industrial Average six years ago with each of the final declines highlighted in red (see Chart 2). This makes it very clear that a transition was occurring as the balance of power in the market shifted.
Chart 2
While not exactly the same in terms of elapsed time, the current bottoming process exhibits the same gradual change in trend slope (see Chart 3). It started with the crash-like drop last October to a January decline that was much more normal in speed (whatever normal really means in the market).
Chart 3
Because the current bear market was so much worse in terms of overall speed, decline the healing process should take longer. I would expect more than one more tradable rally and decline cycle within the basing pattern before the target breakout date of September 2010.
This is far from a forecast but rather it is a framework. It keeps us in trading range mode for the foreseeable future and that means if you are going to play you need trading range strategies. Buy low, sell high.
It should be many months before we can switch to trending market strategies of buying breakouts. It also tells us when we can switch from being traders to being investors again.
Michael Kahn writes the Getting Technical column for Barron's Online, which analyzes sectors and markets twice a week. www.barrons.com. Read his blog at www.QuickTakesPro.com/blog 
*Courtesy of MarketWatch
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