A short-term head-and-shoulders pattern is starting to look
like it could have long-term and ominous significance for the
SPY Turned Back by a Gap
In last week's Market Outlook, I highlighted a head-and-shoulders
top that had formed in
S&P 500 (NYSE:
for that pattern had been achieved and SPY was moving toward
defined by a gap. The gap is at the neckline of the
head-and-shoulders, giving it additional significance. That chart
has been updated to include the most recent
After meeting resistance, SPY fell and ended the week down
fared worse with
Russell 2000 (NYSE:
falling 2.7%. Small caps often lead the market at turning points.
Both indexes are more than 4% below their all-time highs reached
in the first week of August.
This is still a rather shallow pullback, but the
is relatively old and
come to an end one day. This bull market has now been under way
for more than four years, and every pullback prompts questions
about whether this is the beginning of a
Since 1928, there have been 22 bull markets, with a bull
market defined as a price increase of at least 20% in the Dow
Jones Industrial Average over a three-month period. The average
bull market has lasted about 35 months and delivered a price
of 104%, excluding dividends.
The current bull market began in March 2009 (53 months ago),
and the Dow gained more than 140% at its high since then. There
have only been four bull markets that exceeded the current one in
length and four that delivered larger
The bull markets that have been stronger than the current one
are shown in the table below:
Three of those bull markets (the ones that began in 1932, 1982
and 2002) started after historic bear markets. The other two came
after wars had ended (1946 after World War II and 1990 after the
Cold War). So the two longest bull markets have started at the
end of wars.
The current bull market more closely resembles the ones that
began in 1932, 1982 and 2002, coming after the worst bear market
since the Great
. In hindsight, its strength was to be expected. Two of the three
bulls that began after historic bear markets lasted five years.
This current bull market is still more than six months from that
Given the age of the
, it is time to start looking for the beginning of the next bear
market, which will result in a price decline of 20% or more.
Short-term traders should be considering the recent price
weakness as an opportunity to enter short trades to benefit from
a pullback. Inverse
ProShares Short S&P500 (NYSE:
can also be used to
against the risk of further declines. Long-term investors should
await confirmation of a trend change before reducing their
exposure to the stock market.
as Global Tensions Subside
fell 0.21% last week after volatile trading. Fears of military
action against Syria pushed gold higher early in the week. As the
likelihood of extended military action declined, so did gold
prices. Without a global crisis, gold is likely to trade based on
fundamentals, and that could be
in the short
Demand for gold comes from investors seeking a hedge against
or other risks, consumers buying jewelry, and some industrial
uses. This demand is met by miners who bring new gold to market
and the trading of existing supplies of gold.
Miners and other commercial users of gold often hedge their
positions in the future markets, buying
when they believe prices are low and selling when they believe
prices are high. Miners and commercial users are not trading
based on concerns about military action or long-term inflation.
Their positions are taken based on the supply and demand
they see in the markets.
are highly regulated, and large users of gold and other
commodities are required to report their activity to the
Commodity Futures Trading Commission (CFTC)
. Once a week, the
a report summarizing the activity in the various futures. The
Commitment of Traders (
) report shows the positions of commercial traders (miners and
industrial users in the gold market), large speculators (hedge
) and small speculators (individual traders).
I convert the raw data into an
that makes it easier to interpret. The latest data, shown in the
next chart, indicate that commercials are turning bearish as
hedge funds are becoming
. In the past, this setup has been followed by lower prices for
gold or a trading range where prices move only a small
The index based on the COT data uses a scale of 0 to 100 with
100 being bullish and 0 being bearish. Over time, commercials are
generally right and hedge funds, as a group, are generally wrong
in this market. Commercials were increasingly bullish as prices
fell from their 2012 highs while speculators were increasingly
bearish. Since the July bottom in gold, commercials have become
less bullish and speculators have more than tripled their
positions in the market.
It is rare to see gold prices rise when commercials are
bearish. Last week, gold was unable to hold onto gains driven by
the possibility of military action. Gold is a market that seems
potential for now, and traders should consider other
This article originally appeared on ProfitableTrading.com:
Outlook: Is This
Really Almost Over?