A Technical Analysis of the Recent Bear Market

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For the next two months, the market went up. But FusionIQ's Kevin Lane noticed that even as the overall market rose, prices of a majority of individual stocks were falling, a sign the rally was tapering off. The S&P closed at 1,565 on Oct. 9, 2007, an all-time high—though just barely. On Oct. 19, the S&P fell more than 60 points and the bear market began, according to technical analysts.

Like all investors, fans of technical analysis are seeking the bottom. Many thought the market had found one on Oct. 9, 2008. By then the S&P had fallen 75 points, completing a 22% drop that began on Oct. 1. For the next month the index bounced in a range, never trading much above 1,000 or below 820. While stuck in that band, the index had huge single-day moves of 5% or more.

As the market gyrated, chartists searched for signs that it was poised to head up or down. S&P technical analyst Mark Arbeter saw that 88% of New York Stock Exchange (NYX) securities had reached new 52-week lows on Oct. 10—a sign, perhaps, that the market was oversold. But he spotted a red flag. Each time the market dropped back, it would reverse and bounce a bit higher, but the bounces became smaller—a sign that selling pressure was starting to outweigh buyer interest.

On Nov. 19, the S&P 500 broke through the bottom at 820, closing at 792. Then the dam broke. The next day, the S&P 500 smashed through its next level of support—the October 2002 low—like "a knife cutting through butter," says Schaeffer Investment Research's Salamone. The best-case scenario for investors now would be a quick bounce and a drop that holds at 820. But few investors are betting on it.

Web Resources

StockCharts.com has a wealth of educational features that it takes a step further, featuring interactive tools so do-it-yourself investors can add technical analysis to their portfolio management

Investopedia.com offers a technical analysis primer that explains the basics—support, resistance and trends—as well as more esoteric techniques such as moving averages and Bollinger Bands

Levisohn is a staff editor at BusinessWeek covering finance and personal finance.