The assessment of an evolving bear market

  • SPX500
    (${instrument.percentChange}%)

Intoduction

In this article, we use two Bollinger bands and a stochastic as yardsticks to measure the progression of a bear market in the S&P 500. It is worth noting that the analysis will be subject to a time-period bias. We will be using the global financial crisis (GFC) to detail the measures and then apply them to current market conditions. Nevertheless, the inferences from the GFC will likely be helpful if current market headwinds prove to be overwhelming for the market.

The GFC

In the weekly chart below, we use FXCM's S&P 500 CFD, SPX500:
1. The first weakness occurred when the price slipped from the bullish area, between the upper blue and red bands, to the neutral space between the blue bands (first label 1).
2. The weakness progressed when the SPX500 dropped from neutral to weak between the lower blue and red bands (first label 2).
* At this stage, the red Bollinger moved in the opposite direction to each other as volatility started to expand (first set of black ellipses).
* The stochastic dropped to the 20 level and oscillated around this area of weakness (black rectangle).
* Notably, the top red Bollinger band turns down (first black rectangle). This completed the first bearish cycle.

The market then recovers, but we know it's a bear market rally into May in hindsight. The market then begins its dreadful capitulation:
3. The first weakness occurred when the price slipped from the bullish area, between the upper blue and red bands, to the neutral space between the blue bands (second label 1).
4. The weakness progressed when the SPX500 dropped from neutral to weak between the lower blue and red bands (second label 2).
* At this stage, the red Bollinger moved in the opposite direction to each other as volatility started to expand (second set of black ellipses).
* The stochastic dropped to the 20 level and oscillated around this area of weakness (blue rectangle).
* Notably, the top red Bollinger band turns down (second black rectangle). This completed the second bearish cycle.


[Please note the watermark shows the date the author wrote the article, but the X-axis shows the correct dates of the GFC and its evolution]

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Current SPX500 Weekly Chart

  1. The first weakness occurred during the week ending 14 January 2022, when the price slipped from the bullish area, between the upper blue and red bands, to the neutral space between the blue bands (label 1).
  2. The weakness progressed when the SPX500 dropped from neutral to weak between the lower blue and red bands (label 2).

* After last week's volatility, the red Bollinger bands are starting to move in opposite directions (black ellipses).
* The stochastic has moved below 50 (green rectangle).
* If it drops to 20 and holds, this will be a bearish development.
* If the SPX 500 holds in the weak zone between the lower blue and red band, confirmed by a weak stochastic reading, the turning down of the top red Bollinger (black rectangle) will be considered a bearish development as the cycle completes.

Conclusion

We acknowledge that the economics differ significantly between the current market and the GFC. However, the measurements examined do point to a need to be wary. These yardsticks will help measure the severity of price weakness. E.g., if the price can push back up into neutral from the weak zone, it will be a sign of positivity. As such, we continue to monitor.

Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

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