Is a Bear Market in Equities Looming?

A case for another bear market in stocks is developing. I discussed the significance of the 200 day moving average in the July issue of the Gerritz Letter. The 200 DMA is just beginning to slope downward. The 50 DMA is just crossing the 200 DMA to the downside; this is another bad omen which is sometimes referred to as "The Death Cross."   Finally, a classically bearish chart formation referred to as a head and shoulders pattern has developed in multiple equity markets.


In the following chart of the S&P 500 I highlight the head and shoulders pattern. The HS pattern is said to be completed when the market closes below the neckline support and Thursday's low made the breakdown decisive.

If I read the tea leaves correctly, the minimum downside target for the S&P 500 is about 860, which happens to coincide with the support line drawn from the correction lows of July 2009.

(Click on chart to enlarge it for easier viewing)

 
I am expecting an oversold rally to begin shortly that would take the market up to the top of the current down channel. If that rally stalls and the market turns down once again we will have a complete series of lower highs and lower lows, the definition of a downtrend.
 
This confirmed downtrend would be an all clear signal to either short the market or buy inverse ETFs.
 
All but the most agressive portfolios are currently positioned in safe haven bond / income funds and have zero exposure to equities at the moment.
 
I will be looking to buy inverse ETF's for moderate and agressive portfolios should and when the next rally fails.