It's a Slow Death for Bulls
Editor's note: It's a tough environment for bulls right now...
A number of headwinds are weighing on today's market – from rising inflation to ongoing supply-chain disruptions. And while some investors believe staying bullish is still the best play, Ten Stock Trader editor Greg Diamond says the technical setup is telling a different story...
Greg specializes in analyzing past market trends and human behavior – a branch of trading known as "technical analysis." He says that while the causes of bear markets might change, they all follow a similar pattern... and ignoring that pattern could be a huge mistake.
In today's Masters Series, adapted from the May 9 Weekly Market Outlook for Ten Stock Trader subscribers, Greg explains why bulls are set to face a prolonged demise... and expands on a simple analysis technique that can keep you from becoming a victim of today's volatility...
It's a Slow Death for Bulls
If you've ever seen a professional bull fight, it's quite the experience...
I "ran with the bulls" in Pamplona, Spain, back in 2012 (I'll never do it again, for the record). And at the end of the run, there's a professional bull fight.
The bulls suffer a gruesome, slow death of sword swipes and stab wounds before they're ultimately taken down with one final blow.
Stock market bulls are experiencing this kind of pain right now, during the important third phase of this bear market.
You see, bear markets happen for a lot of different reasons. But when you break it down, they all have four distinct "phases"...
- Initial Decline – This sets in after a big run higher in stocks. It catches most off guard.
- Relief Rally – This sets in motion a psychological state for most investors that Phase 1, the initial decline, was just a correction... and the worst is behind us.
- Panic – This is the worst phase of the bear market. Every sector of the stock market suffers large declines.
- Bottom – This phase is marked with capitulation from most investors, extreme pessimism, and a general consensus that the future is bleak.
As I mentioned, we're in the third phase... panic. But it might not feel like a panic right now.
It's not like 2020, when stocks crashed more than 30% in one month as COVID-19 swept the globe...
No major bank has gone belly-up like Lehman Brothers back in 2008...
And there aren't any bread lines like during the Great Depression back in the 1930s...
But even though every bear market has a different "why," they all follow the same pattern in regard to price.
Right now is no different. It's just more painful since it isn't happening that fast.
The bull market is dying slowly.
The final blow may not come for a few months, but the sword swipes and stab wounds are weakening bulls. Those headwinds are mainly inflation, the Federal Reserve, supply-chain constraints, and slowing growth.
What we're seeing is different from all other bear markets because all bear markets are different.
But again, the price patterns are the same.
I'm going to expand on my simple analysis from yesterday. Today, I'll show you why just having a few trend lines is so important in this bear market... and why, despite the big bear-market rallies, this will continue to be a painful year for bulls.
Don't Pay Attention to Percentage Gains
Trading bear markets is hard because the moves down happen fast, and the moves up happen just as quickly.
You see HUGE moves in both directions. You must pick your entry and exit points carefully. But that's easier said than done.
It's why all year, I've stressed to Ten Stock Trader subscribers that they shouldn't pay attention to the percentage gains from rallies. It can be easy to confuse a big rally with a major low and a turning point.
But they're not turning points...
They're bear-market rallies.
We witnessed this at the beginning of the month, when stocks exploded higher after the Federal Reserve meeting.
But it's all within a downtrend. And all the gains after the meeting were swept away... Now, new lows are coming.
Here's what I've been watching for the past week. Take a look at this chart of Apple (AAPL), which just made new lows...
Again, I'm keeping it simple today. Apple has held in relatively well compared to other stocks in 2022. But it's in a downtrend, as noted with the black dashed lines.
Look at what happened recently... The stock made a huge move after the Federal Reserve meeting, but failed to break out above the downtrend and resistance level.
Since that failed breakout, Apple made a new low. It's now well below its 200-day moving average (200-DMA) and in a strong downtrend.
This next chart is of the Dow Jones Transportation Average, or the "transports." It's probably the most important chart I'm following right now, and I'll show you why...
This is where it gets interesting... There's massive support in the transports, as I noted with the horizontal red lines at the bottom of the chart.
When – not "if" – this breaks, it will act like a broken dam... Prices will plummet from a breakdown of that support.
Only a rally above the March 29 swing high will negate my bearish outlook on the transports.
I see it as very unlikely.
Any rally that takes place and cannot get above the 200-DMA, as labeled on the chart, will be a lower high. That creates a trading opportunity.
Let's jump overseas and look at Europe. Much like many indexes and stocks in the U.S., Europe is in a downtrend, too...
This is a chart of the Euro STOXX 50 Index – the "blue chips" of Europe. It's in a well-defined downtrend of lower lows and lower highs marked with the black trend lines. It's also well below its 200-DMA, as noted in red.
There's nothing sophisticated going on here... The downtrend is intact and will remain intact, so it's a slow death for bulls who want to fight this trend.
Next, let's look at Australia using the S&P/ASX 200. Like with the iShares MSCI Canada Fund (EWC), which I outlined yesterday, Australia has held in well. But it topped out in April...
Last week, Australia broke its uptrend (black lines) and fell below the 200-DMA in red. Perhaps we'll get a rally in the short term. Should that be the case, the 200-DMA will act as resistance.
Similar to the transports chart, only a move above the recent swing high in late April would tell me this new downtrend is over.
From Big Tech to the transports, and even Europe and "Down Under," all signs point to one thing...
More pain for bulls ahead.
Good investing,
Greg Diamond, CMT
Editor's note: Greg used his technical analysis strategy to predict the exact week of the 2020 crash three months in advance – and the 2022 sell-off right before it began. And he says the market's next turning point could be right around the corner...
In his latest urgent briefing, Greg details a major event he's expecting on May 25... and why 2022 could see the biggest and longest-lasting market crash since the 2008 Financial Crisis. He says investors who prepare now stand to double their money 10 different times in the coming months. But for those who aren't ready, it could spell disaster. Click here for the full story.