Struggling to Start a Bull Market

If we consider the definition that a Bull Market is a period where the Market moves 20% or more from the previous bottom, we could see the S&P 500 get into Bull Market territory in the next couple of weeks if the selling pressure doesn't spike.

The S&P 500 Equal Weight Index, where every stock has the same weight in the index regardless of how large or small the company is, is already in Bull Market territory.

Reviewing the indexes from the perspective of the losses, there are a couple that are still officially in Bear Market territory.

When we start to see these conflicting signals, it's important to clarify some concepts and start to look for references and milestones that could act as a compass while navigating the Markets.

Market Overview

Even if more indexes start to move into a Bull Market territory, that doesn't necessarily mean that the fundamental problems of the economy are over. A few months back, I manually compiled a list of all the different Bear Markets. Traveling back in time to the Great Depression that lasted from 1929 to 1939, there were 11 Bear Markets during that period of time. However, the highest level reached during Sep/1929, wasn't reached again until Sep/1954, a Market recovery that took 25 years.

It might be an extreme situation, but the monthly chart of the S&P 500 displayed below, illustrates the point with the Bear and Bull Markets during the most violent decline from 1929 to 1932. During those four years The Great Depression was still far from being over and it still had multiple powerful Bull Markets that couldn't change the overall Market direction until many years later.

The full data for the entire Bear Market compilation is displayed in the table below, even if the indexes start to move to Bull Market territory, that doesn't mean anything in terms of avoiding a recession:

Going back to the present time, the pattern seems to be changing in the weekly chart. The Bulls are still trying to break past the milestone of 4,150 that I have mentioned in my previous articles. The demand seems to be too weak to break past the +1 Keltner Channel (KC, highlighted by the yellow areas) and the selling pressure seems to be diminishing since the Bears aren't being able, at least yet, to take the index below 3,600 again.

It will be a meaningful event if the Bulls can reach 4,150 and hold above that level. If the demand stops and the Bears can easily regain control, then lets get ready for another pullback.

The problem comes when we zoom in to the daily chart of the S&P 500. In order for the S&P 500 to get to 4,150 (red arrow) it has to get to the overbought zone which is any level at +3 KC or above. This is the 4th time that the S&P 500, on the daily chart, has been able to reach a level above the +2 KC (yellow highlighted areas), the rest of the times it declined at the +1 KC or below (orange circled areas). In order to cause serious damage to the weekly downtrend structure, it has to get to 4,350 (purple arrow).

Unless there is an incredibly powerful positive catalyst that can keep the index going up for a couple of weeks, despite the overbought levels, I don't see this happening in the first week of February 2023.

Reviewing the New Highs and New Lows numbers (NH-NL), there have been three weeks of bullish numbers which aren't being translated in a powerful rally. The same resistances are being hit without a real breakout movement. If the Bulls don't make tangible results with the current bullish numbers, eventually the turn of the Bears will come and all the current gains could be lost.

Despite all the information presented above, I do have already 7 open trades. Five of them, I still consider them pilot trades because of the size and risk involved. The other two started as pilot trades, but I started pyramiding the positions. If you don't know about pyramiding, stay away from it until you understand how to manage risk in those kinds of trades. Without proper training and testing, pyramiding is a fast way of blowing up your trading account.

Pyramiding involves increasing the size of your position, it can be done with limited risk by using the unrealized profits of an existing successful position. Things can change fast in the Markets, if the position starts to move against you and you don't cut your losses fast, the increased size is likely to cause some serious damage to your trading account.

Don't confuse pyramiding with "averaging down", pyramiding increases the size of a successful position. Averaging down is increasing the size of a position that is already a loser as the stock price continues to decline, with the hope that the average price will help you recover faster. There's a famous picture of a young Paul Tudor Jones in his office that describes averaging down in the simplest way.

Scenarios

Scenario #1: I sincerely hope that I'm wrong, but I think that next week a limited pullback is coming. Bulls have had their chance, at this point there are at least 3 weeks of bullish Monthly New Highs, most days above 1,200 and the index is still going nowhere. If I take SPY as a proxy for the behavior of the S&P 500, the volume is below its 21-day average during 2023. For a healthy pullback, the decline shouldn't go too far below 3,900 because it would start to dramatically increase the fear sentiment in the Market.

Scenario #2: The second most likely scenario, from my point of view, is that finally the Bulls are able to rally, with a little bit of luck to 4,150. I still can't feel the risk appetite when I open my pilot trades. A lot of stops triggered, modest gains in a few trades and only a couple of interesting positions that could end in something great. Anything can happen in the Markets and we have to be ready, no matter if it's next week or in a year. My confidence is still low that this will become a sustainable rally.

Scenario #3: The least likely scenario, especially considering that we are in the earnings season, is that the S&P 500 will move in a narrow range between 4,100 and 3,950. I don't see very likely this sideways movement where the Market can avoid increased volatility.

Summary

We don't trade indexes, unless your plan is completely focused on trading an ETF like SPY, there are thousands of other options out there. However, indexes help in terms of giving some perspective about what's happening in the Markets. No one can consistently forecast the future, but we can play this game based on the probabilities that the Market offers with the help of our trading plan.

The way I see the current situation, only the very best setups have a chance to be profitable for a trend trader. A few breakouts are starting to work but not that many as to consider the current Market situation as the right place and time to make easy money.

Don't get overwhelmed by the amount of information that is available. If you already have a profitable strategy, follow it when the conditions are right. Trading more doesn't guarantee more profits.