Bear Market?

Stocks are falling so freely that I'm having a hard time judging charts on the 26 stocks added today to the Zacks top-buy list. At this point, they're recorded losses on the day ranging up to 6.5%. Only two are showing gains.

Everything looks equally ugly. The world is dark and threatening, and there is no joy on the charts.

Amid such gloom, I have bigger fish to fry than searching for bullish charts. What sort of market are we in today? Is the bull market of the past three years over? Should I be looking for bear plays instead of the bull plays that have dominated my trading this year?

Looking at the S&P 500: The index has fallen intra-day for the past five trading days, and in relation to the prior day's close for all of those days.

The last similar losing streak occurred from Nov. 16 through Nov. 25 -- seven trading days showing intra-day losses, all also down against the prior day's close.

The November 2011 decline amounted to 7.9%, open to close, a loss of 99 points on the S&P 500. The current April decline as so far cost the market 4.1%, a loss of 58 points.

None of that, of course, says anything about the nature of the market today -- bull or bear. That is determined  by where the price stands in relation to what has come before.

The November 2011 decline, viewed on a 5-year weekly chart, is barely visible amid the powerful rise from the March 2009 recession bottom.

It reversed at a low point higher than the previous low, and so must be defined as a bull-market correction. By December the price had risen back to where the decline began.

The current April decline has brought the price down to levels last seen in early March -- not that long ago.

The previous correction low on the S&P 500's run up from last December is 1340, or 21 points below the present level. A fall below that level would set up the potential for a bearish chart.

A fully bearish configuration would require an upward reversal from below 1340, and then a downward reversal from below 1422, the prior high.

Implied volatility on the S&P 500 has -- no surprise -- taken a jump. It hit a six-month low of 14.38% on March 26, and is presently at 20.33%. that puts it at about the level it saw during a three-day minor correction in early March.

Oddly, the last similar correction -- the November 2011 downturn -- saw declines in the S&P 500's implied volatility.

Implied volatility is calculated from options prices, which in turn are determined in part by market demand. From the rising implied volatility in the current downturn, I conclude that traders are taking it more seriously.

This April downturn has more conviction than did its November 2011 cousin.

Using the April 2 high of 1422.38 as a base, implied volatility gives a 68.2% chance that the S&P 500 will close between 1382.08 and 1462.68 a month from now. Unless there is a reversal, today's close will be the first below that range since the correction began.

The current price gives a range of 1322 to 1400. Putting that in perspective: 1400 is where the S&P 500 was trading on April 5, and 1322 was touched on Feb. 2.

The bottom line for me is that I'm not willing to declare it a bear market yet. A decline below the March 6 low of 1340.03 would put me into neutral, and a reversal from a high lower than 1422.38 would turn my outlook bearish.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.