The New Sell and Sell Short: How to Take Profits, Cut Losses, and Benefit from Price Declines, Expanded Second Edition

EVERY BULL STUMBLES

The spectacular upside reversal of the stock market in March 2009 was followed by a broadly based rise. By the end of 2009, there was hardly any doubt that we were in a bull market.

A bull market tends to last four or more years, but this does not go in a straight line. The classics of technical analysis, starting with Charles Dow and Robert Rhea, wrote that a typical bull market has three stages:

• Stage One is the recovery from the ridiculously low prices at the end of the preceding bear market

• Stage Two is the rise that reflects the growth in the real economy

• Stage Three is the speculative blow-off after the previous two stages building a stand from which to jump into the next bear market

The transitions between these stages are not smooth. Quite the contrary, these typical stages of a bull market are punctuated by severe corrections.

At what stage were we by the end of 2009? It was certainly not the happy third stage, nor the second stage, since the economy was still very much in the doldrums. We were in Stage One, in recovery from the lows of the preceding bear market. With Stage One already nine months old and the signs of weakness appearing in the New High-New Low Index, it was reasonable to expect a temporary drop in the market.

Google (GOOG) has been one of the leaders of this bull market. Notice its relative strength during the preceding bear market—in March 2009, while the market averages sank to a new low, GOOG stayed well above its ...