• When — and HOW — the current ‘bear market’ could flip bullish…
• Why traders should be ready for anything right now…
• PLUS — little-known secrets that could help you trade a possible market reversal…

Hey, Evolver.

As the trading week chugs along, the major indexes continue to steer the overall market direction…

The SPDR S&P 500 ETF Trust (NYSE: SPY) and the Invesco QQQ Trust (NASDAQ: QQQ) have both been stuck in consistent downtrends since hitting near-term tops on Thursday, September 2. 

After six straight weeks of seeing lower prices, many are probably asking … when will the bear market end?

Look at the Big Picture

Before zooming into what’s going on currently, let’s zoom out and gain some perspective…

In the big picture, the stock market is still in the midst of a spectacular bull run.

After hitting the “pandemic bottom” on March 20, 2020, SPY has been on a nonstop tear to new all-time highs.

September saw traders finally put the brakes on … slightly. There was massive economic unrest in China, as well as continued anxiety around the fates of high-profile spending bills in Congress.

U.S. tech stocks got slapped, while Chinese equities have been completely decimated…

Now, let’s be honest. This market is so accustomed to constant bullishness, some traders are treating this slight downtrend like it’s the end of the world. It’s impossible to ignore if you’ve been trading the past month and a half. 

Frankly, the “bear market” is hard to see if you zoom your charts out a bit — SPY is only down 2.82% in the past month (at the time of this writing).

Plus, September is a historically weak month for stocks. It’s the only negative month for SPY on a total historical basis. 

Here’s yet another example of why knowing your history is critical. 

If you did well in September, mazel tov. But if you didn’t know that September is a classic bear month, you may have been wondering why your entire watchlist was getting sold off.

It probably wasn’t your lack of stock-picking skills — it was due to overall market pressure. And for now, that pressure’s still on…

Watch for Bottoming Signs

So when will the ‘bear market’ reverse back into an uptrend? 

First of all, no one knows if that’s even going to happen. 

Many bears are calling for an enormous plunge in the stock market, viewing this dip as the initial crack in a giant iceberg of zombie companies. 

Realize that this is a possibility. Always be prepared for anything.

Then again, this isn’t the most likely scenario…

Just like momentum runs inevitably run out of steam, short-term bear markets often end with sharp reversals to the upside. 

Bottomed-out reversals can reveal incredible trading opportunities on the long side. When the market hits a hard bottom, it can be like a blow-off top in reverse.

So, assuming a huge crash doesn’t take place (yet), what signs can we watch for a bullish reversal in the major indexes?

• Volume: Watch closely for a SPY green day with elevated trading volume (100 million shares or more)…
• Options Flow: If SPY and QQQ’s options flow begins to tip noticeably bullish, it could be a signal that big money is betting on a big pivot upwards…
• Sentiment: This is more difficult to track through hard data … you have to feel it. But if you want my advice, stalk FinTwit like a hawk. If you notice a clear shift in how other traders are talking about the market’s direction: pay attention.

Lesson Summary

• The near-term bear market is real, but it’s also a bit exaggerated…
• If the major indexes find a bottom and break out of their current downtrend, going long on great stocks (or options) could be a winning strategy…
• But you need to be ready for absolutely anything. We could just as easily see a break of support (and a move to lower lows)…

Conclusion

This is a time for traders to stay on high alert.

As this historic, big-picture bull market butts up against a nagging downtrend, anything could happen…

Watch for bottoming signs. Stay tuned into the major index charts. And keep your ear to the ground for any change in internet sentiment.

Be careful,

Mark Croock

Editor, Evolved Trader Daily