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How to Distinguish Between a Market Correction & a Bear Market?

How to Distinguish Between a Market Correction & a Bear Market?
March 27, 2020 Martha Stokes CMT

How to Distinguish Between a Market Correction & a Bear Market?

Use List for Technical Analysis of Candlestick Patterns

The candlestick chart below is a good example of a Rounding Top Candlestick Pattern which is the hardest of all the tops to see before it breaks to the downside, as they tend to do during a Market Correction. For Swing Trading, Position Trading, and Long-Term Investing, it is important to recognize a Rounding Top Candlestick Pattern early. This allows sufficient time to plan exit strategies, mitigate downside risk on long-term holdings, and helps Swing Traders get ready to Sell Short. The Rounding Top actually started at the previous lower Trading Range.

When interpreting a candlestick chart in order to determine how to distinguish between a Market Correction and a Bear Market, it is imperative to keep in mind the following:

  1. The Stock Market Structure has changed massively in the past decade, so consequently the older technical patterns, candlesticks, and trends have changed. Therefore, these change what you need to study and analyze in the stock charts.
  2. The Downtrend behaves differently than the Uptrend. It moves faster with a more severe Angle of Descent™ than the Uptrend, which alters analysis interpretations.
  3. Who controls price action tells you what to expect next. Just recognizing a Dark Cloud or Engulfing Black Candlesticks is not enough because that is just basic Technical Analysis.
  4. Topping Candlestick Patterns have altered in major ways. This means you must learn the new Topping Candlestick Patterns, otherwise you may be buying a stock as it is topping without even knowing it.

The index candlestick chart above is a good example for learning how to distinguish between a Market Correction and a Bear Market by using the above list of Technical Analysis areas that Retail Traders must learn.

Invest in a Bear Market

Read more about How to Invest in a Bear Market and Prosper in a Stock Market Correction HERE.

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Notice how precisely price trades to the highs and lows of the sideways price action. First there are slightly lower highs, then the lows were higher in the Trading Range, and finally the highs are lower.

The next area to study for how to distinguish between a Market Correction and a Bear Market is how precisely the lows of the sell down days stop at the technical support levels of the lows of prior months shown with orange arrows, which is typical of a Market Correction. The Downtrend is highly technically oriented, which means identifying the support levels when trading Sell Short is imperative.

It also is critical for Swing Trading and Position Trading as it identifies where Stop Losses should be placed, and if the stock drops through that technical support, a Market Correction is underway.

At each phase of this Topping Candlestick Pattern, a different Stock Market Participant Group was controlling price. During the Topping Trading Range, Dark Pool Quiet Rotation™ by giant Buyside Institutional Investors controlled price. This is evident in the preciseness of the highs and lows of that range. When the black candlestick broke through the support lows, Professional Traders started to Sell Short, which frequently triggered High Frequency Traders HFT to also Sell Short. This led to Smaller Funds Volume Weighted Average Price sell orders and Stop Loss sells to begin firing off, and that created the big sell down.

Summary

There is far more to trading stocks than just finding a stock pick to trade, searching for a MACD crossover, or recognizing a popular Candlestick Entry Signal. When you understand the dynamics of the chart and can analyze it like a Professional Trader to distinguish between a Market Correction and a Bear Market, trading becomes easier and more profitable.

Find more information on How to Sell Short Stocks HERE.

Trade Wisely,

Martha Stokes CMT

TechniTrader technical analysis using a TC2000 chart, courtesy of Worden Bros.

Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses

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Martha Stokes, CMT is co-founder and CEO of TechniTrader. She is a retired professional Buy-Side Analyst and was awarded the Chartered Market Technician designation for her thesis, "Cycle Evolution Theory." Martha is a passionate teacher of the financial markets and a prolific writer, having created over 40 stock, option, and financial market courses.