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Dow Theory : Visiting the phases of bear market

Time to visit the Dow Theory again.

Note:

I am summarizing it from the Technical Analysis book by Edwards and Magee.

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3 Phases The Bear Market

1. Distribution Phase

– Starts from the later stage of the preceding Bull Market

– Farsighted investors sense the fact that business earnings have reached an abnormal height and unload their holdings at an increasing pace.

2. Panic Phase

– Buyers begin to thin out

– Sellers become more urgent

– Downard trend of prices suddenly accelerates into an almost vertical drop

– Volume mounts to climactic proportions

– There may be sideway movements after this and then…. the third phase begins

3. Final and ‘dump them’ phase

– More discouraged selling on those who have hold their ‘gems’ till the last or have bought it in the Panic Phase because it is cheap

– Business news now begins to deterriorate

– Downward movement is less rapid

– Better-grade stocks decline more gradually

– And it will be over before the last of the bear news is out

What do you think? Do you agree that we are now in Phase 2?

I have attached SPX chart to highlight the phases that I think we are in.

One reply on “Dow Theory : Visiting the phases of bear market”

Yes, I think we may be just entering bear phase 2.; however Phase 3 may happen sooner than we think! One thing that has troubled me throughout the past year is the lack of volume on the moves. Lately most of the significant moves seem to have been futures related.

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