From the August 01, 2009 issue of Futures Magazine • Subscribe!

Riding the bear

It is an underlying principle of all rivers: jump in and no matter how hard you fight, the current will sap your strength and take you along with it. Conversely, if you swim with the current, it will carry you along with little effort. This is analogous to trading in sync with the market’s cycle and bias.

Whether the market is bullish or bearish, the function is the same: to bring buyer and seller together. Bull and bear markets are just different ends of the same stick. The key to consistent success is recognizing which end of the stick the market is holding.

Market cycles are long, extending for many months and even years. In some respects, all bull markets act the same and all bear markets are marked with identical characteristics. The stock market is always in one of two states of prolongation. In other words, the larger market is either bullish or bearish. Each market cycle must be treated differently. In most cases, a bull market lends itself to holding positions for long periods, while a bearish market is a trading market. Keep in mind, however, that these states are a backdrop to the intermediate-term action and are not tradable themselves.

One of the best tools for determining the market’s cycle is a monthly chart with an 18-period simple moving average (see “The big picture”).

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