Prepare for the Bear

05/26/2010 1:30 pm EST

Focus: MARKETS

Mark Leibovit

Chief Market Strategist, VRTrader.com

Update: Mark Leibovit told subscribers late Tuesday that he has switched to a Neutral stance on stocks for now, but that "I think we're headed much lower, but that could come just as easily later in the summer."

Mark Leibovit, chief market strategist for VRTrader.com, says stocks are now in a clear down trend, and he advises watching the Dow Transports especially carefully.

Though the market rallied nicely Friday, the charts show a clear down trend with lower highs and lower lows. Though the bulls will fight for control here now that they have established important support, one must give the bears the benefit of the doubt until the indexes can push through their previous highs (1173.57 for the Standard & Poor’s 500 index).

There are plenty of technicians calling for a market bottom at this time. I advise extreme caution. I remain on my Timer Digest Sell signal. We are oversold, but there are no broad-based Positive Reversals (tm), and my cyclical forecast for the months ahead is mostly negative.

I cautioned you that there were too many bulls out there. Most of them are looking, I suppose, at the double bottom but ignoring the most important ingredient of them all—volume. The “big boys” are selling, and whether they plan to crash the market now or later in the year I cannot say, but don't get in the way of the bearish freight train. It's roaring down the tracks and this one could be worse than any one you've seen so far.

In my opinion, the next great bear market is about to emerge, and the “art” of forecasting now entails trying to determine if the powers that be will try to change the course of history and attempt to rally the markets first. I believe it may be wise to consider holding a core inverse index position with a view to add to it should the market rally.

The Dow Jones Transportation Average [has held its] 200-day moving average, which is clearly a short-term positive. We have to wait and see if real buying emerges and until that occurs, I would only assume a minor technical bounce followed by a resumption of the down trend.

But the Transports hit a new intraday low Friday and have now established lower highs and lower lows. Nevertheless, the Transportation index continues to act strong relative to the other indexes and could be a leader to the upside if support holds.

Under 4077.34 would be a new low since the April 30th 4812.87 bull market high. The February 5th low is quite a distance away, sitting at 3733.05. If that low comes out, there would no question in my mind that a full-fledged bear market is under way.

If the US dollar is going to be viewed as bastion of safety, albeit temporarily in the months and years ahead, I guess you have to own dollars, because the creampuff is going to hit the fan in the stock market regardless if we see a rally this summer or not.

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