Is The Dow In A Bull Market Correction?

So is the bull really dead or are we in a bull market correction now? This has been the question that many investors are asking now after the nerve wrecking two weeks of plunge in Dow Jones Index. This fear has been echoed by markets in Asia and Europe. Almost all the three major continents have their own woes as investors fret over China’s move to tighten lending, Obama’s plan to reform US financial sector and the Greece’s deficit crisis.

However, the Dow Jones index is no clinging on to 10000 level from its high of 10780 in January 2010. This represents only a 7% drop in the index and there could be more room for the drop to come. A bull market correction typical occurs in the range of 10- 15% market adjustment and the Dow Jones index is probably just half way there.

Let’s look at past history of bull and bear market data of Dow Jones before we look at where we stand currently.

History of Bull and Bear Market for Dow Jones

Bear market is defined as major stock index declines of 20% or more from its previous closing peak during a one-year period.  In total ,there have been 33 bear markets 1896 to 2007.  Since its establishment up to 2007 the Dow was down on average 34.63% during the bear markets. The declines ranged from 53.57% on the deep side (1932) to the shallowest drop of 21.16% (1990). They lasted, on average, nearly 11.5 months, ranging from 36.55 months (1946-49) to 1.81 months (1987).

In a shorter period, since World War II, Bears appear less often, are smaller, but last a bit longer. In those 63 years there have been 11 bear markets, 10 fewer than in the preceding 49 years. Bears suffered 29.71% on average, ranging from 45.08% (1973-74) to 21.16% (1990). Their average length was 14.17 months, with a high of 36.55 months (1946-49) and a low of 1.81 months (in 1987).

When a bear market ends, a new bull market begins. The Dow’s history indicates that the average bull market in the post-World War II era has gained nearly 136% and lasted four years and four months. The bull has delivered three giant bull markets; a 354.8% gain for the period of 1949 to 1961, a 250.4% increase from 1982 to 1987, and a 395.7% advance during the years of 1990 to 2000. In many cases, market drops during the bull runs are merely corrections, which mean declines of at least 10% but less than 20%. Over the Dow’s history there have been 74 of them, 32 of which occurred after World War II, and the average drop was almost 14%.

Where do we stand currently ?

DJ has broke through the up trend channel line and now hovering around the 10000 level which also coincides with the 26D moving average. Take note that this is a weekly candlestick chart. If we take the yardstick of 10 and 15% correction, we should be looking at 9600 or 9100 as next support level for DJ to complete this correction. Hence, I am of the opinion that there is more room to drop. The last two candlesticks on the weekly chart below seem to indicate a matching low pattern or at least a temporary support. But i am not impressed with the volume to sustain any strong rebound here.