When a bear market first kicks off, it’s extremely frustrating for traders.
That’s because there are many shapes and forms the bear can take.
Typically, a bear market will unfold one of two ways… either as a sharp sell-off, or a long drawn-out affair.
The fast crash we saw in early 2020 was the sharp kind of market correction. The bear market we’ve been in since 2022 is of the second variety.
This kind of bear market requires patience to navigate successfully.
It’s taken some time, but I now see two clear parameters that will determine where the market goes from here.
Let’s look at a price chart of the S&P 500 to show you the two possible scenarios I’ve identified…
Since June 2022, the market has been trading sideways in a wide 658-point range spanning 4325 to 3667. This market structure is called a running triangle (blue lines).
Once a triangle completes, prices move in the direction of the larger trend. In the case of the S&P 500, this trend is still to the downside.
All triangles have five distinct legs. I’ve labeled these legs on the chart using the letters A, B, C, D, and E.
Once the “E” leg of the triangle completes, we’ll likely see a sharp reversal that’ll take the S&P 500 to much lower levels.
The price trigger that’ll confirm this bearish scenario is if the market breaks through 3855, which is the closing price from the March 13 low. This breach will see the market trade lower to at least 3200.
On the other hand, bulls are hoping the market can break through 4179 on the upside. If the market can trade higher through this level, it would eliminate the bearish triangle scenario.
Whenever I’m working closely with a market, I make it a priority to identify both a bullish and bearish key level as soon as possible.
Once I have those levels, I have clear parameters to trade with. For instance, if the market confirms the bearish triangle scenario by breaking below 3855, then I know to play the short side.
Keep a close eye on both key levels I’ve identified. It won’t be long now until the market tips its hand.
Happy trading,
Imre Gams
Analyst, Market Minute
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Source: Jeff Clark Trader