Was this winter’s dramatic drop in U.S. blue chip share prices a short-term “adjustment”? Or was it the beginning of the next long-term down cycle? There are clear standards one can use to determine whether we are entering a real bear market.

When the S&P 100 (OEX)’s leading five-month average price falls below the lagging 13-month average price, it’s a bear. If you want to throw in a few confirming signals, look for negative signals from your lower chart’s Momentum and MACD indicators.

This does not guarantee that every day, week or even month will finish out bright red. But you can be pretty well assured that the falling 13-week line will act like a brick wall, and each upside episode will be followed by a new low.

This setup ought to seem depressingly familiar: It is exactly what happened from 2000 to 2003. And it is exactly what is happening now. Toss in how the market anticipated the 2001 recession by some four months, and the parallels to our current situation are quite remarkable.

Take it a step further: Link those two tops, and draw a parallel line across the bottom between them, and you get an idea as to just how low the market could go before finding the next bottom.

Now I’m not going to tell you that every single stock on the S&P 100 is definitely going to get cut in half. Technical analysis ain’t tea-leaf reading, palmistry or the like. It doesn’t tell you your fate. Heck, it doesn’t even guarantee that any particular stock is going to fall on any particular day.

But it sure can tell you the odds of a particular stock falling sometime reeeeal soon, especially one that has rising costs and a failing sales base.

Adam Lass
Editor, WaveStrength Options Weekly