Defining the Bull & Bear

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Stocks & Commodities V. 25:13 (14-22): Defining The Bull And The Bear by Chuck Dukas

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by Chuck Dukas

Bullish and bearish are terms frequently usedto describe the price behavior of financial instru-ments. What exactly do they mean?

TRADING TECHNIQUES

Analyze The Trend

insight to any financial instrument on any time frame.Although the principles will be illustrated with dailybars, you can utilize the concepts on intraday data,daily, weekly, or any time frameson commodities, stocks, or indexesor in fact any financial instrumentsubject to market forces.To be able to precisely categorize

all price activity into the six phasesenhances your ability to assess the quality of the pricestructure of the instrument you are examining. Youcan take this one step further by categorizing pricewith specific moving averages enabling you to statis-tically analyze price structure. In addition, this al-lows you to compare the quality of different instru-ments using specific criteria, enhance objectivity,and reduce subjectivity. Finally, but perhaps mostimportant, it is a guide on how money can be de-ployed in the markets; the core principles of trendanalysis can be used in constructing trading systemsor in adjusting capital exposure in an instrumentaccording to its phase.The blueprint of phase analysis will demonstrate

Defining The Bull

the need and practice of applied technical analysis todetermine and uncover market trends for successfuldecision-making.

DEFINITIONSBullish refers to upward price action, but not allupward price action indicates further trend. To beable to determine whether upward price action isbullish, you need to view the price action in thecontext of what preceded the current price activity.By comparing current price action to recent priceaction and longer-term price action, you can classify

current prices into specificphases. This gives you anobjective definition ofprice phase.There are a number of

ways to determine thecontext preceding the current price action. For sim-plicity, uniformity, and availability, we use movingaverages. Moving averages offer smoothing, whichevens out the variability of short-term price move-ment. They are also useful as comparative tools,where a shorter-term moving average is comparedto a longer length. This comparative feature meansprice can be rated to both recent as well as longer-term averages, meaning current price can be rated inthe context of recent as well as long-term price.Most important, the slope (direction) of a movingaverage is an excellent tool for both trend and pricephase analysis.The classic definition of trend is a series of highs

and lows over time. Uptrends are defined as a seriesof higher highs with a series of higher lows in

ll price action can be categorized intosix phases of trends that describe thecycle of markets. You can apply this

And The Bear

All price action can becategorized into six phases oftrends that describe the cycleof markets.



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M A M J J A S O N D 06 F M A

60 Period channel

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ET E Trade Financial - daily

An uptrend is a series of higher highsand higher lows over a given time frame

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60 Period channel

60 PMA

200 PMA

Lower highs

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A downtrend is a series of lower lowsand lower highs over a given time frame

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FIGURE 1: UPTRENDS. Here are higher highs and higher lows in a 60-period channel.

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FIGURE 2: DOWNTRENDS. Here are lower lows and lower highs in a 60-period channel.

between (Figure 1); downtrends are se-ries of lower lows and lower highs inbetween (Figure 2). Our trend analysisuses a 60-period channel (one earningsreporting quarter on daily data) of highsand lows to show when new highs andlows are occurring. Price channelbreakouts are coincident with trendinitiation and continuation.Arithmetically, a series of higher

highs and higher lows translates into amoving average that will slope upward,and as price action continues over time,this will result in a longer-term movingaverage sloping upward.Using daily price data, we use the 50-

period simple moving average, which is10 weeks of price action (or most of aquarterly earnings reporting cycle). Thisis sufficiently responsive to reflect thechanging dynamics of price behaviorwithout being influenced by short-termswings. Next, we incorporate the 200-period simple moving average (SMA),which represents 40 weeks (just overthree quarters), capturing the longer-term dynamic of changing price behav-ior. I refer to these two indicators asinstitutional rudders, demonstratingdistinct patterns of price behavior aswell as how the markets are steered(Figure 3).To summarize, we define current

as now, prices immediately precedingnow as recent as the structure embod-ied in the 50-period simple moving av-erage, and long term as the structurecaptured by the 200-period SMA. Put-ting these parts together leads to pre-cise, specific definitions of price actioninto six phases of price trend. I willdescribe these phases in the typical se-quential order of a cycle.

PHASE DESCRIPTIONSThe descriptions will start with the begin-ning of the phase cycle. This can be com-pared to the movements that occur in abell curve. We start with the buy side andcycle to the sell side. For simplicityssake, we will abbreviate period movingaverage to PMA.



FIGURE 3: THE INSTITUTIONAL RUDDERS. Here are the 50- and 200-period moving averages with transitionpoint or slope change.

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50 PMA

200 PMA

SUN Sunoco Inc - Weekly

The "institutional rudders" are the 50- and 200-period moving averages. These two averages demonstrate how the marketsare steered.

The transition point displays the change in slope. This signifies when price potentially changes its trend.

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Recovery phaseClose > 50 PMAClose < 200 PMA50 PMA < 200 PMA

The recovery phase begins with theclose of current price above the 50 PMA,but the close of price is less than 200 PMAand the relationship of the 50 PMA is lessthan the 200 PMA. In this price structure,recent and longer-term price structures areweak, but the current price structure isstrong enough to have overcome the re-cent weakness. In this phase, there fre-quently are no new lows in the price chan-nel and the 50 PMA is losing (or has lost) itsdownward slope. Because a downtrend isdefined as a series of lower lows withlower highs in between, the absence of nonew lows in the 60-period channel is thebest evidence of the downward trend end.

Accumulation phaseClose > 50 PMAClose > 200 PMA50 PMA < 200 PMA

As price begins to stabilize or improve, the close of thecurrent price is above both the 50 PMA and the 200 PMA.However, the relationship of the 50 PMA is still less than the200 PMA. This defines the accumulation phase. In this phase,current price is sufficiently strong to be above recent price andlonger-term price but the recent price structure has been weakrelative to the longer-term price structure. In this phase, youllsee new highs frequently in the 60 period channel, the slope ofthe 50 PMA is upward, and the 200 PMA slope is losing or haslost its downward slope.

Bullish phase

Close > 50 PMAClose > 200 PMA50 PMA > 200 PMA

The characteristic of price activity is at the highest level ofpositive phase analysis. I liken it to going into battle with a fullbattalion of soldiers behind you, yielding your best chance ofsuccess. We now have the current close greater than the 50 PMAand the 200 PMA but most important, the relationship of the 50PMA is greater than the 200 PMA.With this definition in place, the analyst, trader, or investor

can then examine the quality of instruments in a bullish phase.The characteristics of the highest-quality bullish phase are: 1)A series of higher highs in the 60-period channel (coincidentwith trend initiation or continuation), combined with 2) an

upward-sloping 50 PMA, which is above 3) an upward-sloping200 PMA (both of which lag but define this phase). Above all,continued new highs in the 60-period channel both confirm theuptrend as well as lead the 50 PMA and 200 PMA to continue.

Warning phaseClose < 50 PMAClose > 200 PMA50 PMA > 200 PMA

The warning phase is similar to the top of the bell curve. Thecurrent close is less than the 50 PMA, but it is still a positiveclose that is greater than the 200 PMA and the relationship ofthe 50 PMA is greater than the 200 PMA. In this price configu-ration, current price is weaker than recent prices, but the pricestructure historically has been relatively strong. Price below adownward-sloping 50 PMA is a more severe warning than if the50 PMA is still upward. With an uptrend defined as a series ofhigher highs with higher lows in between, the absence of nonew highs in the 60-period channel is the best evidence of theuptrend trend ending.

Distribution phaseClose < 50 PMAClose < 200 PMA50 PMA > 200 PMA



As price begins to weaken or decline, we now have thecurrent close of price below both the 50 PMA and the 200 PMA,but the relationship of the 50 PMA is still greater than the 200PMA. In the distribution phase, the 50 PMA is still above the 200PMA, which means that although price is weaker than both,there was sufficient recent action high enough for the 50 PMAto still be above the longer-term average. The slope of the 200PMA is losing shape. In this phase, there are frequently newlows made in the 60-period channel.

Bearish phaseClose < 50 PMAClose < 200 PMA50 PMA < 200 PMA

The characteristic of price activity is now at the lowest levelof negative phase analysis. The current close is less than the 50PMA and the 200 PMA, but most important, the relationshipof the 50 PMA is less than the 200 PMA.With this precise definition in place, you can then further

examine the quality of instruments in a bearish phase. Thecharacteristics of the bearish phase are: 1) A series of lowerlows in the 60-period channel, combined with 2) a down-ward-sloping 50 PMA, which is below 3) a downward sloping200 PMA (both of which lag, but define this phase). Aboveall, continued new lows in the 60-period channel both con-firm the downtrend as well as lead the 50 PMA and 200 PMAto continue down.

BUY-SIDE PHASESNow that you know the definitions of phases, lets work oncombining them. The groupings of the recovery, accumula-tion, and bullish phases describe what is known as the buyside of phases. Depending on the user, the buy side includesentering long as well as exiting short (Figure 4).

SELL-SIDE PHASESThe groupings of warning, distribution, and bearish phasesdescribe what is called the sell side of phases. Sell sideincludes exiting long as well as entering short (Figure 5).

THE SIX PHASES OF THE DIAMONDThe diamond methodology (Figure 6) helps analyze pricebehavior as it changes over time. Markets will cycle betweenbursts of intense price activity and periods of stability. This isthe natural flow of expansion and contraction of price cyclesthrough the six phases. The insights that the diamond providesact as a compass in determining price strength or weakness ofany financial instrument that can be traded.The diamond is broken into two equal and distinct sections.

The left side of the diamond is the buy side and the right sideis the sell side. There are six phases of price behavior in thediamond: two clearly trending (bullish and bearish) and fourwhere the trend is less evident, where it could be ending orbeginning. The two phases where there are sharpest pricemovement over time are referred to as bullish phase for the

FIGURE 4: THE BUY SIDE. Here you see the recovery, accumulation, and bullishphases of the buy side.

FIGURE 5: THE SELL SIDE. Here you see the different phases in the sell side ofthe trend analysis diamond.

FIGURE 6: THE TREND ANALYSIS DIAMOND. The diamond is made up of boththe buy side and sell side.



uptrend and bearish phase for thedowntrend. If the market has exhibitedan expansion of trend over time, thelikelihood of a pullback could unfold.The warning phase in an uptrend andthe recovery phase in a downtrend mightbe signaling the start of what could bethe beginning of a countertrend move.In the progression of market cycles,

markets move in a bell curve manner.We begin to see buying interest fol-lowed by acceleration in price and vol-ume. Price may then plateau; sellersstep in and begin liquidating long posi-tions. This sets the stage for an increasein selling activity, and then price willdecline until it establishes a floor forsupport. Once a base is built, price lev-els out again, and the cycle of priceactivity repeats itself.

STATISTICAL ANALYSISArmed with the knowledge of the phasedefinitions, you can now statisticallyanalyze market strength and/or weak-ness. There are four tables of daily pricedataone year (Figure 7), 10 years, 20years, and 75 years (Figure 8). Thesetables summarize the phases in which atradable financial instruments price oc-cupies as a percentage of time.All tables are sorted with the bullish

phase being placed at the top. On thebuy side, when price is in the bullishphase, a 60-period channel higher highis accumulated only in that phase. Thesell side indicates when price is in thebearish phase, accumulating each 60-period channel lower low only in thatphase. The tables are divided for thebuy-side phases and the sell-side phases.

COMPARATIVE ANALYSISNow you are ready to compare variousfinancial instruments using this data.For the comparative examples, the DowJones Industrial Average (DJIA) equi-ties (Figure 9) are ranked according to atop-down approach to phase strengthand weakness over a 10-year span.Procter & Gamble had the greatest safetybased on the bullish/bearish phase com-bination. P&G was in the bullish phase56% of the time, accumulating 240 new60-period channel higher highs. Duringthat same period, price was in the bear-

FIGURE 7: ONE-YEAR ANALYSIS. The Dow Jones Transportation Average occupied the bullish phase 77% of thetime. While being in that phase price accumulated 36 new 60-period channel higher highs, during that same timeperiod price was in the bearish phase zero percent of the time.

FIGURE 8: A 75-YEAR LOOK. The Dow Jones Industrial Average occupied the bullish phase 44% of the time. Inthat phase price accumulated 1,833 new 60-period channel higher highs. During that same time period price wasin the bearish phase 19% of the time while making 507 new 60-period channel lower lows. Note that 63% of all priceactivity occupied either the bullish or bearish phases.

FIGURE 9: BULLISH/BEARISH PHASE COMPARISON. Procter & Gamble had the greatest safety based on bullish/bearish phase comparison. SBC Communication had spent the least amount of time in the bullish phase.



ish phase 8% of the time, whilemaking 17 new 60-period channellower lows. Viewing the same (10-year) period, SBC Communicationspent the least amount of time inthe bullish phase (32%), while ac-cumulating 135 new 60-periodchannel higher highs. During thatsame time frame, price was in thebearish phase 27% of the timewhile making 73 new 60-periodchannel lower lows.Following is a 20-year view of

the strongest index compared tothe weakest equity (Figure 10).The Standard & Poors 500 hadthe greatest safety and strength,while IBM lagged the overall mar-ket.Drilling this comparative analy-

sis a step further, the S&P 500occupied the bullish phase 38%more of the time than that of IBM,while making 294 additional 60-period channel higher highs. IBMoccupied the bearish phase 43%more than that of the S&P 500 while making twice as manynew 60-period channel lower lows.

PHASE ANALYSIS ANDCAPITAL DEPLOYMENTThere are a variety of ways that you can apply phase analysis.One way is to only have full long positions in instruments thatare in the bullish phase and full short positions in instrumentsin the bearish phase, while having less capital exposed duringthe other phases.For example, a full long position in the bullish phase could be

logically reduced when the instrument passes from bullish intowarning, and eliminated or further reduced if the instrumenttransitions into the distribution phase. From the short perspec-tive, a full short position could be in the bearish phase, andreduced or eliminated when the market transitions into therecovery or accumulation phases.On the flip side, if you are interested in going long, you could

enter a lesser initial position in the recovery or accumulationphases, increasing exposure as prices transition into the stron-ger price phases. The given example deploys full positions inthe safety and strength of either a bullish or bearish phase.Another approach could be laddering your position based onthe strength of the phase. You might choose to build a long-term position in a financial instrument. If that were the case,then in the recovery phase where price begins to build its baseyou would expose a one-third position.As price begins to stabilize or improve and makes its move

to the accumulation phase, you would increase the exposure byanother one-third position. You now have a two-thirds posi-

FIGURE 10: STRONGEST BULLISH PHASE VS. WEAKEST BEARISH PHASE IN THE DJIA. The S&P 500 occupied thebullish phase 55% of the time and while being in that phase accumulated 617 new 60-period channel higher highs. Duringthe same 20-year time span, price resided in the bearish phase 13% of the time, making 81 new 60-period channel lowerlows. IBM occupied the bullish phase 34% of the time, accumulating 323 new 60-period channel higher highs. During thesame 20 years price resided in the bearish phase 23% of the time, making 130 new 60-period channel lower lows.

tion at risk. As price cycles to the bullish phase where safetyand strength is at its optimum, another one-third position isadded bringing the exposure to a full position.

CONCLUSIONConsidered by many Wall Street pundits as the greatest traderwho ever lived, Jesse Livermores quote some 75 years ago stillholds the test of time: There is nothing new on Wall Street orin stock speculation. What has happened in the past will happenagain and again and again. This is because human nature doesnot change, and it is human emotion that always gets in the wayof human intelligence. Of this I am sure.As defined here, the phase analysis concepts will act as a

compass for making buy and sell decisions. They act as a guideby mapping out how your capital can be deployed in themarkets, and showing you the basis on which to develop asound money management process.The relationships of phase analysis reflect the realities that

human behavior repeats itself and are inherently cyclical.Consequently, phase analysis is the relationship of price be-havior to the institutional rudders, again the distinct patternsof price behavior. Phase analysis is the ability to articulate anddemonstrate the bearish and bullish market phases as youdecide when to buy or sell. The quality of price is measured asit expands or contracts through six phases of price activity.Phase analysis offers you the ability to objectively define pricebehavior into specific categories by using a combination ofreadily available tools. Doing this allows you to statisticallyanalyze price structure.You can also compare the quality of different instruments



using these specific criteria and visually recognize trend behav-ior, hence enhancing objectivity and reducing subjectivity.

Chuck Dukas is a principal in a hedge fund and president ofTRENDadvisor.com, a website that provides trading recom-mendations and education services to better equip the traderto understand the markets and prepare them to trade indepen-dently. Dukas is past chairman of the New England chapter ofthe Market Technicians Association.

RELATED READING

Dukas, Chuck [2006]. The TRENDadvisor Guide To Break-through Profits: A Proven System For Building Wealth InThe Financial Markets, John Wiley & Sons.

Smitten, Richard [1999]. The Amazing Life Of Jesse Livermore:Worlds Greatest Stock Trader, Traders Press, Inc.

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