The basic definition of a bull market is a series of higher tops and higher bottoms. On 1/20/22 the S&P 500 (SPX) moved below the prior correction bottom made on 12/03/21. This break below important support was a significant clue that a bear market may have begun after the SPX 01/04/22 all-time high.
In the next few trading days two other events could confirm a US Stock bear market.
Traders/fund managers measure their performance relative to SPX action. The SPX – 200 –day Moving Average (MA) is perhaps the most widely followed price indicator. Moves above the 200-day – MA confirm bull markets, moves below the 200 – day – MA confirm bear markets.
Whenever the SPX nears or reaches the 200 -day – MA it probably triggers a massive battle between bulls and bears as each side fights for dominance. The question, how big of a break of the 200 – day – MA would indicate which side is winning?
I’ve done an extensive study of the SPX price action relative to its 200 – day – MA going back more than twenty – years. The majority of the time when the SPX has a break of less than 2% below the 200-day -MA it indicates a correction within a bull market. Breaks greater than 2% are hints that additional bearish action could soon be coming. The initial breaks below the 200- day – MA are usually in the range of one to five – trading days.
The daily SPX chart courtesy of Trading View illustrates breaks of the 200 – day – MA since February 2020.
On 02/28/20 the SPX broke more than 6% below the 200-day – MA indicating the bulls could not defend the line and hinted the bears could soon be ready for a more vicious attack.
The bear runs that culminated on 06/15/20 and 06/29/20 showed the bulls were in control by holding both breaks of the line to less than 2%.
The break on 01/21/22 has so far only gone .76% below the line. SPX reaction to the FOMC interest rate decision on 01/26/22 could give a decisive 200 – day – MA signal.
Whenever a stock or a market does something different from normal behavior it’s usually a clue of a developing trend change. For the SPX in 2022, the “something different” would be a decline greater than 10.55% from the high made on 01/04/22.
So far the largest correction of the SPX bull phase that began in March 2020 was the 10.55% correction that terminated on 09/24/20. If within the next few trading days, the SPX can reach 4310.26 it will equal the 10.55% correction of September 2020. A move below 4310.26 would be “something different.”
Within the next few trading days there could be two clues confirming a bear market in US stocks.