Ask Colin

What charting criteria would suggest the difference between a bull market correction and the start of a new bear market?

This is one of the more difficult things to judge. A bull market is defined as a series of higher peaks and higher troughs in the market index. When a significant corrections starts, the index comes off a significant peak. There is no way of knowing at that point whether the peak is simply another peak in a bull market or the last one that leads to a bear market. However, there may be clues in the form of what is happening around us at the time. If there are strong signs that we may be in the terminal “rampant speculation” phase of a bull market, then the likelihood of a peak being the last one in a bull market is much higher. Here I refer to my phase analysis, which is outlined in my book Building Wealth in the Stock Market. I also provide my analysis in real  time on the members website.

However, in my opinion, trying to predict whether we are looking at the last peak or not, is the wrong question to be asking. No matter what some of the guru-following lunatic fringe of technical analysis preach, it is not possible to predict the future with any consistency. What we should be asking is how high is the risk that we are looking at a potential top of the market? If the bull market is young and there are few terminal signs, then we should adopt a different stance than when the risk is high. So, instead of trying to guess if it the final top, it is better to assess the level of risk and adopt an appropriate strategy. If the risk is low, you might hold all your positions and let the individual sell-stop levels look after the risk. However, if the risk is high, it may be more appropriate to take some money off the table. My investment plan has some quite specific rules and guidelines for this sort of approach.

Something that is often forgotten in investing is that there will always be some losses. It is impossible to have an absolutely perfect record where every investment is profitable and where some profits are not given back at the end of the process. Anyone looking to buy at the bottom of a trend and sell at the top is not aligned to the reality of the market and still seeking the Holy Grail of investing. It is no sin to take some profits and then get back into an investment once the danger is passed. The brokerage cost in getting out and in again is often much less than the potential losses if the situation quickly deteriorates. This is much more likely to happen when the risk is high.