Michael Sincere: 7 danger signs of stocks’ coming bear market

1. Stocks break through key technical levels:The S&P 500 SPX, +0.96% will break through 2,000, then 1,980, and by the time the S&P 500 drops below 1,960, the technical damage will be so great it will be hard to recover (in a worst-scenario, all technical levels could be breached in a day or two). In addition, look to see if the indexes fall below their 50-, 100-, and 200-day moving averages. This is an important technical signal. If there is no bounce, this will also generate automatic computer-selling programs.

2. Rallies have less energy: You will see lower lows and lower highs on a chart, and eventually the market will break hard to the downside. Trader Mark D. Cook says that you can tell the strength of a market by the way it rallies rather than the way it declines . If the rallies are sluggish and heavy, this is a clue the market is rolling over. In a bear market, there are lifeless rallies in a low-volume environment.

3. Investors focus on prices: Prices are the last indicator to confirm there is a bear market. By the time prices have plunged, it’s usually too late to avoid financial damage.

4. Sideways movement: From Dec. 19, 2014 through February 6, the market has gone nowhere. Although unknowledgeable investors believe a churning market is healthy, it is not. Legendary trader Jesse Livermore went short before the 1929 crash because he recognized that a churning market is a danger sign. Put another way, when the market is pushed up too high on little volume, it will not end well.

5. Sentiment shifts: Investor sentiment indicators, which have been on the high side, will move to neutral, and then reverse direction as investors watch their portfolios disintegrate. Right now, investors are complacent but that will turn to fear as prices fall.

6. Panic selling: As the bear market matures, fearful investors who have been patient will throw in the towel and sell what they still own. Although investors are told that bear markets are buying opportunities, most investors do not have the patience or discipline to hold, let alone the courage to buy when the market stops plunging. (Note: Don’t buy on the way down.)

7. Bears gain respect: As the decline worsens, bearish forecasters are no longer ridiculed, while perpetually bullish strategists who had made outlandishly wild predictions are challenged. In the final stages of a bear market, the bullish investors are mocked.