Bulkowski's Review: From Bear to Bull in 2002

Written by and copyright © 2005-2011 by Thomas N. Bulkowski. All rights reserved.

It is easy to look back and see where a bear market changes into a bull market, but what can be learned from the analysis? This page takes a closer look at the turn from a bear market in 2002 to a bull market.

The chart above shows the Dow Industrials on the weekly scale.

First, let's talk about detecting a trend change from bear market to bull market. It is a three step process, called a 1-2-3 trend change. Step 1: I drew a red trendline down from the peak at B to the low at A such that the trendline does not intersect the Dow (which occurs at 1) until after the low at A. When the Dow pierces the trendline moving up, that completes the first step of a trend change.

The second step is the retest of the low. This occurs at 2 when price attempts to make a new low but fails.

The final step is when the average exceeds the high between the low (A) and the retest of the low (2). I show that at 3. Those three steps define a trend change from down to up.

Now that we know the bear market has changed into a bullish one, how far will price rise?

Valleys D, A, and 2 form an unsymmetrical head-and-shoulders bottom chart pattern. The reversal marked the turn from bear market to bull at point A. The measure rule for the pattern says to take the distance from the head low (A) to the neckline directly above (I will use the line at 3). That difference is 1,895. Since the measure rule for a head-and-shoulders bottom works 74% of the time in a bull market, I multiply the height by 74% to get an adjusted height of 1,402. This I add to the value of the breakout, point 3, to get a price target of 10,478. I show the target on the chart. Notice how the average pushes through the target but stalls soon after.

If you think of the head-and-shoulders bottom as a Big W chart pattern, a reversal pattern at the bottom of a valley with tall sides, then the price target would be the price at B. Price reaches the target just 46% of the time, but it makes for a good target. An old high is also a known resistance point. In this case, the average reached the old B high at C and then stalled.

-- Thomas Bulkowski

Copyright © 2005-2011 by Thomas N. Bulkowski. All rights reserved. A racoon tangled with a 23,000 volt line today. The results blacked out 1,400 homes and, of course, one raccoon.