Guest Commentary, by Clive Maund

New bull market or sucker rally?

August 8, 2002

Clive Maund is an English technical analyst, holding a diploma from the Society of Technical Analysts, Cambridge and living in southern Bavaria, Germany where he trades US markets. This article was orginally published July 31, 2002.

Anyone who read my earlier article in Prudent Bear entitled “The Great Crash of 2002”, posted July 11, will probably recall my description of the giant Head-and-Shoulders top in the S&P500 index. The index has since broken down from this top and this breakdown has been followed by a pullback towards the neckline of the Head-and-Shoulders formation. This pullback has now, in my view, run its course and we are currently presented with one of the finest shorting opportunities of all time.

So, as cool pragmatic speculators, let’s look at the opportunities and risks associated with the two main scenarios facing us, namely that we have now seen the bottom and the dawn of a new bullmarket is upon us and, alternatively, that the rise over the past week was a classic sucker rally following a major chart breakdown which will be followed by huge decline.

Playing Devil’s advocate for a moment, let’s just suppose that the bottom is in, what can we, as bulls, look forward to? A long tedious advance through a quagmire of overhead supply from millions of investors locked in at the higher prices prevailing over the past five years. Such an advance would be punctuated, of course, by sharp selloffs. Where would we set our stop loss level on the S&P? 880? 860? 800? Difficult to say, isn’t it?

Now let’s look at what bears have in prospect. Bears who short the S&P500 (or a basket of stocks) can look forward to the biggest panic selloff of all time over the coming weeks and months, quite likely weeks rather than months. This panic has a minimum target at 560 on the S&P500. With the neckline at approx. 930, a close stop loss level can be clearly defined. I would put it at 955, which, in my estimation means that one is unlikely to be shaken out by a whipsaw move.

So, which would you rather be? A bull looking for a long slow advance through massive overhead supply, with vague or arbitrary stop loss levels, in a market perched on the edge of an abyss – or a bear with the prospect of huge, swift gains and the assurance and security of tight, clearly defined stop loss levels??Not much of a contest, is it?

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