A Look Back at the 2002 Bear Market Bottom

Nov 20, 2008: 11:01 AM CST

With the US Equity market breaking to fresh 2008 lows, challenging and breaking support levels formed in 2002, let’s take a look at how the actual bottoming process formed in the 2000 – 2003 bear market.

S&P 500 Bear Market from 2000 to 2003 (Weekly):

The bull market peak occurred at 1,530 just before October 2000 before the S&P 500 lost a full 50% to bottom in October 2002, almost exactly two years later.

This chart captures the entirety of the bear market during the “technology bubble burst” (the same time at which the NASDAQ market lost 80%).  You can see that the bottom was not a magical, one time event, and clearly no one ‘rang a bell’ or anything at the bottom.

I would argue the best point for re-entering the market came around 950 when price broke the 20 and 50 period EMAs to the upside after forming a triple-bottom style pattern about the 780 index level.  I would suggest you do the same in the current environment – wait for positive price movement above key averages before re-entering.

Notice also that the bottom was formed on a large-scale and small-scale positive momentum divergence.  The large-swing divergence occurred as price made the “September 11th” low at 944 with a new momentum low (remember, ‘momentum precedes price’) and then as price formed the 775 low in July ’02, the momentum oscillator registered a marginal higher low.  As price breached the 775 low to form the 768 low in October, it was clear that a positive momentum divergence had formed, which was the ultimate bear market bottom.

As price came back to stop at the 788 index level – only slightly higher than the previous low – the momentum oscillator registered a clear higher low, completing a multi-swing positive divergence that took over a year to build into the price structure.

Let’s see the actual bottom a little closer.

S&P 500 Bear Market zoomed in (Weekly):

StockCharts.com registers the actual low at 768 while I just heard on CNBC that the commentators were proclaiming the actual low to be at 775 so there’s a slight discrepancy there.

That aside, notice the obvious positive momentum divergence going into the 768 price low.  Price then returned to test the 20 week EMA before failing at this level and swinging back down to find support at the 788 level.  Until we formed this higher low at 768, there was absolutely no reason to get bullish – the positive momentum divergence by itself is never enough to confirm a market turn.

Price then formed its first “higher low” and then swung back up to break the 20 and 50 week EMA while forming a “higher high” which confirmed as a market re-entry signal (having formed a triple bottom, multi-swing positive momentum divergence, breaking above key EMAs, and completing a ‘pure price’ trend reversal).

One notable yet significant difference in the previous bear market and the current bear market is that it took roughly 3 years for the S&P 500 to fall from 1,530 to a bottom near 770 for a 50% drop.  We peaked in October 2007 above 1,550 and have already tested 775 for a 50% decline in 1 year and one month.  I cannot underscore how significant that fact is.  More insidiously, there are no major technical signs (like we saw in 2002/2003)  that we’re at a bottom yet.

Take a moment to pull up these charts and apply your own analysis and indicators to see how they reacted during the 2000 – 2003 market and see if you can draw possible parallels to the current environment.

2 Comments

2 Responses to “A Look Back at the 2002 Bear Market Bottom”

  1. Anonymous Says:

    Corey,

    All I could see is the bear-cross in Oct 2000, and the current one you pointed out in yesterady posting “Midweek SP 500 Overview”. Probably the bottom is taking place more than one year from now?

  2. Corey Rosenbloom Says:

    I wish it were that easy! The monthly averages did indeed cross which is a huge development, but that doesn’t mean we need to run out and short the market indiscriminately. Moving averages do lag price action, and the monthly averages lag by quite a bit. The last time this happened was mere months before the bottom but there’s absolutely no guarantee the same will happen again. The market has faller further faster than it did earlier this decade and – some argue – we’re totally in uncharted territory.