![\"Chart\"](\"https:\/\/cdn.jeffclarktrader.com\/JMU\/images\/202004\/20200423-jmu-01_wwo993.png\")
<\/div>\nLongtime readers know I use this chart to define bull and bear markets. If the S&P 500 is trading above its 20-month EMA, stocks are in a bull market. If the index is trading below the line, the bear is in charge. Some examples of when that line was breached to the downside, and foretold a bear market, are marked by red arrows above.<\/p>\n
As we can see, that 20-month EMA line was broken at the beginning of March. So, the bear market is on.<\/p>\n
But, we had several clues to suggest this would happen, well in advance.<\/p>\n
The Moving Average Convergence Divergence<\/a> (MACD) indicator at the bottom of the chart provided one of the early warning signs of a bear market.<\/p>\n Without getting too complicated, if the black MACD line is trading above the red line, stocks are in a bull market. When the black line crosses below the red line, traders need to be on the lookout for the bear.<\/p>\n Notice how in 2000 and 2007, the MACD indicator gave us that “bearish cross” from extremely overbought conditions (the red circles on the above chart). In both cases, the S&P 500 dropped into a bear market a few months later.<\/p>\n It’s these two indicators, working together, that paint the clearest picture of an imminent bear market.<\/p>\n That’s why the market didn’t crash when the S&P 500 dropped below its 20-month EMA in 2010 and 2011 (the green arrows on the chart). In both of those situations, the MACD was more neutral than overbought. There wasn’t a bearish cross in 2010. And in 2011, the bearish cross reversed before the end of the year.<\/p>\n So, we didn’t have the conditions necessary for a bear market back then.<\/p>\n But in October 2019, the storm clouds looked a little more ominous. The MACD indicator had already completed a bearish cross in November 2018. And, it never made a strong reversal as it did in 2011.<\/p>\n Instead, the black and red lines stuck together. The bullish momentum never returned. And that was another significant warning sign.<\/p>\n Of course, the stock market did recover from the December 2018 breakdown. And, the S&P 500 did manage to make a new all-time high in July.<\/p>\n But, that action created negative divergence on both the MACD and Relative Strength Index<\/a> (RSI) indicators – marked by the blue lines on the chart.<\/p>\n Negative divergence – when a chart makes a higher high, but an indicator makes a lower high (shown by the blue lines above) – tells us that the momentum behind the rally is waning. It’s a sign of a potential change in trend from a bull market to a bear market.<\/p>\n So, we had multiple “bearish crosses” on the MACD… and negative divergence on the MACD and RSI… and we had a breach of the 20-month EMA. If you’re looking for clear proof that we’ve entered a bear market, you could do a lot worse.<\/p>\n If you’re looking for more proof, though, I share a few other reasons in a special presentation I recorded recently (click here to watch it<\/a>).<\/p>\n Best regards and good trading,<\/p>\n Jeff Clark<\/p>\n P.S.<\/strong> The bear market is here. There’s no denying it.<\/p>\n It’ll be a scary time for most everyday folks who own stocks. Long-term investors who aren’t prepared (and that’s most of them) could soon lose a lot of money…<\/p>\n But not traders. Traders don’t fear market crashes. In fact, we get excited about them. As scary as they seem, they can be a goldmine for trading profits… <\/p>\n![](\"https:\/\/casey-assets.s3.amazonaws.com\/images\/misc\/jeff-clark-signature.png\")
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