Bear Market Rules Refresher

Erin Swenlin

Erin Swenlin


I must sound like "Debbie Downer", given this is my second ChartWatchers article with "bear market" in the title. I am bearish right now, but had to remind myself of "Bear Market Rules" Thursday after getting a little too bullish on Wednesday.

As with many in the business, I was beginning to get bullish with the rotation back into the growth areas of the market. We were seeing participation increasing in Discretionary, Technology and, in some cases, Communication Services. We even had a follow-through day (fourth day of a rally) last week. However, on yesterday's decline, I realized that I had forgotten about "Bear Market Rules" as that would've told me to better temper my expectations.

What are "Bear Market Rules"? I did a workshop on this a long time ago, and recently Mary Ellen McGonagle and I talked about them on Chartwise Women.

Click here to register in advance for the recurring free DecisionPoint Trading Room! Below is the recording from last Monday.

Topic: DecisionPoint Trading Room

Start Time: Feb 7, 2022 09:01 AM

Meeting Recording Link.

Access Passcode: February#7

  1. Overbought conditions in a bear market -- expect a new down leg.
  2. Oversold conditions in a bear market -- "thin ice", no solid foundation for price bounces. Bounces can be bull traps.
  3. Buying into a bear market is dangerous regardless of the bullishness of the chart.
  4. Expect bearish conclusions to bullish chart patterns.
  5. Manage long-term positions as if they were short-term positions.

I'd like to think that my aging short-term memory was the reason that I "forgot" about them, but, I have to say, the charts on Wednesday did look promisingly bullish. After Thursday morning's big drop from the rising trend channel likely due to the CPI report showing accelerating inflation, price was beginning to make its way back to positive territory. Then it fell apart. The breakdown was exacerbated by St. Louis Fed President Bullard suggesting a full percentage point rate hike by July. So it was a double whammy for the market. (I did talk about this possibility on Tuesday with subscribers).

After the market closed on Thursday, we identified an downside initiation climax* to DP Alert subscribers. A downside initiation climax tells us to expect more decline. We were churning this morning and losing ground. Then we got the news that the White House was expecting Russia to invade Ukraine before the finish of the Olympics. The market sold off in earnest.

*A climax is a one-day event when market action generates very high readings in (primarily) breadth and volume indicators. We also include the VIX, watching for it to penetrate outside the Bollinger Band envelope. Climaxes indicate either initiation of a price move or exhaustion of the current trend.

Conclusion: When the market is correcting or in a bear market, we need to remember that bullish expectations should be tempered. Oversold conditions that you we see often in bear markets become "thin ice", a poor foundation for an extended rally. That is what I forgot on Wednesday. Lesson learned.

Good luck & good trading!

Erin Swenlin, VP & Sr. Technical Analyst -

Technical Analysis is a windsock, not a crystal ball. --Carl Swenlin

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Erin Swenlin
About the author: is a co-founder of the website along with her father, Carl Swenlin. She launched the DecisionPoint daily blog in 2009 alongside Carl and now serves as a consulting technical analyst and blog contributor at Erin is an active Member of the CMT Association. She holds a Master's degree in Information Resource Management from the Air Force Institute of Technology as well as a Bachelor's degree in Mathematics from the University of Southern California. Learn More