I would like to begin a series bear market essays. The objective is to learn how we can position ourselves so we arrive at the bottom of this PM bear market with both our capital and psychology intact. For it is only if we can preserve these will we be able to execute on what I believe to be a generational opportunity for prepared astute investors. This first essay is mostly just the charts of previous major bear markets of the past 100 years. Yogi Berra said: You can observe a lot by just watching! That’s the idea of this first piece. I have put together some action packed charts of these major bear markets and its astounding to me what one can learn from them. Even though they are all different, they have similar features and consistent themes. They all can be broken down into three psychological phases with the price action!. They all have a clear bear market point of recognition (POR), all occurring in the second phase, and their third phases, can be seen to be absolutely horrific, due to the logarithmic plotting.

I have followed the markets for 30 years and been a constant reader of market history and commentary during those years, however I have never seen a study presented in this way that gives a nuts and bolts, up close and personal view of these bears as this will give you. It should open your mind and allow you to see and understand a bear market as you have never seen before. You will see how a bear market is a process. A process that must progress through various stages of price action and psychology. The original observation of the 3 phases of the bear came from Robert Rhea. When one reads the source material from both Rhea and William Hamilton one sees that the analysts of old really have no equals in todays world. What I have done is try to attach chartology to the phases that Rhea discovered. I have never seen this attempted, this is a new original science. Therefore it is a work in progress and by no means do I have a lock on it. I solicit anyones critique on my methodology and how I can do it better. There is a lot I don’t see here, especially in the charts.

I should first explain some of my methodologies that I have come up with. Please reread my original definitions to the three phases. I chose to call the first phase the distribution phase as this describes its primary feature. Since distribution begins by professional and informed private investors before the actual top of the bull, I chose to depict the start point for phase 1 at the beginning of the last discernible chart formation that leads to the peak in pricing. This is because the pros are actively distributing their holdings to the retail public. The distribution phase continues on to where stocks sell minus the hopes from the preceding bull and progresses to where the optimism and excitement which existed with the preceding bull are wiped clean. There is still hope of course, but the hope associated with the top no longer exists. I believe an appropriate point to denote the end of this process is where the market completes its topping chart formation as it is at this point where clearly these functions have been accomplished. The market then progresses into phase II, the panic or institutional capitulation phase. This is the longest phase and is normally a gradual process, with a few exceptions, 1937 being one of them. This is the phase that reflects decreased earning power and deteriorating business conditions. The public slowly wakes up and experiences a collective reversal of expectations manifesting itself in the POR. This event is procedurally consistent through all the bear markets. Rarely in the world of markets is anything so consistent.

Once the POR is in, the markets normally crash concurrently then progress into a series of attempted consolidations or reversals that may manifest themselves as bear market rallies (BMR), or spiky short squeezes and eventually succumb to the gravity of phase III. In Phase III they get sucked down the vortex, in a final horrific treacherous collapse, a power dive of liquidation which destroys not only the financial capital, but the psychological frame of mind one needs to be able to maintain to win the battle for investment survival. Phase III is truly a rare, short brutal event that can appropriately be described as annihilation. It is most appropriate to define the starting point of phase III as the point where the attempted reversal and consolidation patterns have run their course and the price action breaks through to the downside and converts the prevailing psychology of remaining hope into that of disillusionment ultimately resulting in distressed liquidation. When viewed on a chart this point is quite prominent. In todays market it arrived when the price action broke through this summers diamond formations.

The most valuable bottom line point these charts reveal is how to look for a bottom. Here’s the principle: Once a market encounters a POR, you know you are in a bear market. All calls for a bottom after this point are invalid until the market enters into an identifiable phase III, where the majority of the decline occurs. A bull market signal is only valid in phase III. Until the market undergoes a cathartic selling event and volume then begins to recede on subsequent declines any attempt at a bottom will fail and it is false. All the bottom callers you have heard over the past few months do not know this fact. This is the single most valuable lesson from these charts. It is no less than scandalous that anyone dishing out market opinion does not know this. One can only attribute such ignorance to laziness, lack of knowledge and wishful thinking. Now you know why I never take professional opinion.

So let’s begin in chronological order, keeping a close look at each charts similar traits and specifically the brutality of phase III declines.

1907 Copper Bear Market

I call this the copper bear because the final financial collapse was triggered by the failed speculation of the copper interests. The top was propelled by great speculation centered in the copper industry and the new discoveries in Montana. There was great manipulation of copper shares and actual physical metal, but by late 1907 the ring had been broken and it led to receiverships and a banking panic. We can see a nice tight H&S top with the neckline violated by the push down triggered by the SFO earthquake. This was a big deal since insurance companies had to liquidate portfolio positions to cover claims. Nice H&S backtest taking 2 months to complete then onto a 5 pt expanding triangle reversal pattern which took 7 months to complete. (counts not shown). This long lengthy consolidation finally broke down for no apparent news driven event, beyond gradually rising interest rates. It broke down with a thunderous crash, accompanied, of course, with a phase II POR. As we always get following a POR-crash sequence is an attempt at a consolidation. This consolidation turned into a 4 point symmetrical continuation which resolved into another crash, ushering in phase III. Here we have a typical pattern: POR-crash-consolidation-crash entry to phase III. It looks eerily similar to our current set-up in the PM market. In April we had a POR-crash followed by another crash in June followed by a diamond consolidation and now entry into phase III. Could we now be set-up for a crash?

You can see once the phase III zone was entered it did fast work. The attempt at consolidation was a short lived 2 month pathetic 4 pt. descending triangle (how do you think that’s going to resolve?). It resolved of course with another crash, but this time one of epic proportions. Jesse Livermore describes in his book reminiscences as the day they did amputation without anesthetics. Being a short seller, Jesse said this was the day that he held the entire stock market in his hand. The data series does not include volume so we can’t see if it dried up at the bottom as is the norm in other bottoms. Specific issues of blue chip stocks were smashed beyond recognition, Anaconda from 76 to 25. Morgan supported US Steel from 50 to 22 while still earning $15/share. The list goes on. I mention these prices chartologists because you need to start thinking this way. Rambus’ POs for big cap gold miners are doable! This was indeed a selling climax and serious money loves bear markets and is prepared for such a climax. This bear is an example of how the final decent can indeed be treacherous and one must prepare oneself for such a possible outcome.



1921 Post War Inflation Wring out

The 1921 bear market was due to the post war inflation wring out. The government stood by idly and let the market do its work. It did what 10 years later Andrew Mellon advised Hoover to do: liquidate capital, labor, & debt. Thats the purpose of a bear market. Industrial production collapsed faster than it did during 1931 in the great depression. The result, a relatively short, but brutal bear market that set the economy up for 9 years of prosperity. Chartologists should love the perfect measured move off of its well formed H&S top followed up by a classic double backtest. Once the backtest failed the POR arrived right on schedule in early to mid-phase II and of course in a crash. After a series of 3 continuation wedges/flags the market gave it up and crashed directly into a phase III liquidation. It tried a recovery, but was followed by failure resulting in its final crash and bottom. My data series does not show volume, however my text books say it was a low volume bottom. This bear is an absolutely classic picture of how a bear market “should” unfold. Its quite beautiful actually as I believe this is what happens when a market is not artificially propped up and nature is allowed to take its course. I suspect our current PM bear may have similar characteristics since it does not have sanctioned support from the authorities. Later on when we get to 1937, observe how it is much more deceptive and radical, I suspect due to the government intervention of the prior 5 years and the air that it was built upon, maybe like our general stock market today. We can see here how devastating phase III was with a 26% loss in just 7 short weeks. If after the POR one had waited until phase III psychology appeared and let the selling burn out he would have been safe. Essentially it ended with a double bottom with lower volume on the second. The double bottom carves out a nice upward slanted inverse H&S, like the gold bottom of 1976, This bear exhibits the principle of secondary reactions and how they typically last 3 weeks to 3 months and recover 30-60% of the previous leg. This is one of my favorite bears due to its text book simplicity. This bear should be exhibited in the Smithsonian museum.



Ursa Major-Daddy Bear 1929-1932

This is the Father of all bear markets, the 100 year flood line. The endless selling orgy that eclipses all others of modern times. A short political point, if you haven’t read America’s Great Depression by Murray Rothbard you really owe it to yourself to do it. I hate to burst your bubble, but everything you have ever heard or been taught about why it all happened just happens to be wrong. Yes, that includes Ben Bernanke “student of the depression” and his false narrative, its pure BS. While you are at it read The Bubble that Broke the World. by Geret Garrett if you want the real debt soaked story of why it all happened. Ok back to the technicals, Phase I had been going on for a long time before the great crash of October 1929. You have all heard the Joe Kennedy shoe shine boy story. Well, that happened in May 1929 after getting stock advice from the shoe shine boy he went in and sold em all!. That’s Phase I action. The the great bear kicked off with a lightning bolt thunderclap heard around the world. We know now this was the markets way of announcing this was going to be big. Ultimately an 89% decline in the Industrials and it would change the corse of the nation for the next 100 years, epic indeed. The volume of the crash was not exceeded until 1962. The crash was followed up with a 5.5 month rising wedge retracement rally on increasing volume. Hope and speculation was returning to the market. In mid April 1931 the wedge finally broke down followed by a second attempt with bear flag. Once that flag failed it ushered in the POR accompanied with a crash. The next 2 years was a continuing series of consolidations, BMRs and a steady stream of disasters. You can see the scoreboard: 4 phase II crashes and a final epic phase III crash.


Wow, look at this, at the end of phase II we have a continuation pattern in the shape of a diamond. The only diamond in the sequence and it ushered in Phase III. Could this be prospective for our current PM bear? What we need to grasp here is how utterly destructive phase III was and how fast it occurred. From March to July the market lost 53% in a grueling, take no prisoners liquidation. This was simply annihilation on a rampage. This is why it is so important to see this coming and to understand what can happen in a phase III. Even if you had been the smartest guy on your block and stayed in cash and waited for the market to have sold off 76% and figured that’s enough the market can’t go down much more so I am going to jump in, you would now precede to lose 53% of your money. That’s the destructiveness of phase III. That’s why when your favorite gold bug newsletter writer claims things are dirt cheap you need to tune him out until phase III runs its course. This diamond looks somewhat similar to the diamond we just exited in today’s PM charts. Note how there just was not any rally worth trading in phase III. This is a good example of why I have often stated that phase III liquidations simply are not tradable, certainly not from the long side. Finally note how volume dries up in the final bottoming sequence. After 3 years we finally have chart action that indicates a bottom may be near.


I have always remembered this: 1929 was when the dumb money lost it, 1930 was when the smart money lost it, 1931 was when the really smart money lost it and 1932 was when the genius money lost theirs. Note how the volume finally dried up coincident with prices crashing to further lows. That was the sign the bottom was finally forming. Another thing this chart shows is there is always money on the sidelines to enter the market. You want proof? Take a look at the rally off the bottom, despite an 89% decline massive volume reenters the market from the sidelines. A few more things to apply from this chart; 2013 has seen the HUI decline 57%, therefore, conventional wisdom claims next year will likely see some kind of rise or a bounce back since, we are due and it just can’t keep going down forever…right? Well, in 1931 the Dow went on to lose 53% that year, and that was still in phase II, it hadn’t even hit phase III yet! So yes, it can decline considerably more.

Single-Digit Blue Chips

In the spirit of preparing ourselves for future prices in the gold space check out the prices of quality blue chip stocks at the end of phase III. John Deere from 163 to 3.5, AT&T 310 to 70 with a 13% dividend, RCA 114 to 2.5, In the following year many of these stocks would increase 3-4 times. U.S. Rubber, a blue chip would go from 1.5 to 25 in a year. This Bear more than any other bear drives home the principle of: Serious money is made in identifying the probability of a bear market low, not by buying apparent bear market bottoms Another lesson this bear reveals is buy and hold is a flawed belief. No such creature has ever emerged from the other side of a full fledged phase III like this one. The problem with buy and holders is they are never able to carry out the second half of their strategy when confronted with a phase III.

1937-1942 Reflation rally and early war bear market

The 1937 Bear was an extremely deceptive market. It occurred after a 5 year advance fueled by government policy intervention. It reflected an industrial collapse which struck with lightning swiftness and quickly crushed investors with a 49% decline. It is hard to analyze this market as its really 2 bear markets in one. I chose to take the comprehensive view and show the entire 5 year affair as they really are connected. To do this I depicted a bizarre 2-stage Phase III. Once the first short 3 month phase III did its damage the market entered into a long 2 year melee resurgence which ultimately broke down into a war entry liquidation event. This final phase III knee capped investors to the tune of 30% over 6 months, one of the longest phase III intervals…true brutality. The chief lesson one can derive from this series is the cause of the rapid catastrophic decline of phase II immediately after the POR. Consider this bear vs. the classic 1921 event where the government stood aside and did nothing. The 37 bear was the result of government stimulus and intervention finally flaming out. The volume characteristics of the 32-37 rise are somewhat similar to what we have witnessed over the past 5 years since 2009 in the general market, declining volume throughout fueling a prolonged rise. It was a false long term retracement rally essentially masquerading as a cyclical bull market, fueled by decreasing volume and once it flamed out it was simply an air-ball…pretty much what we have today. The series starts with a typical H&S topping pattern with a nice measured move once the NL was violated. Note the weak volume during the aggressive backtest phase that actually blew back through the NL by a significant margin. Once that test gave it up it was a violent gap laden downward cascade powered by climaxing volume. Quite impressive and of short duration, in only 2.5 months the DOW imploded 41%. Truly stunning. I will say it again, I believe this collapse is the analog to our current general stock market environment. This is the deflation shock scenario that I believe we are at the cusp of which the gold market is currently telegraphing. Once the POR-crash was over, as in all bears, we attempted a consolidation, which ultimately failed, again ushering us into phase III. You are starting to see this movie play out again… POR-crash-consolidation-crash- phase III entry.


As I mentioned, here is where my artistic license comes in as I have labeled this as phase III-A. I could have ended this bear here, but I included the next 3 years as all in the same. The following 2 years was an assortment of confusing rallies and rapid declines. The initial volume surge in September 1939, when the Nazis invaded Poland, was due to the memories of the great commodities boom on the NYSE in 1915. In that year the markets had surged once the exchange reopened as it was clear the US would be the “arsenal of democracy” (sarcasm intended). From late 1939 to May 1940 the market build out a 5 point falling wedge reversal with a deceptive false breakout , but resolved itself with the Dunkerque collapse. The war time news was grim, but this collapse was followed up by a nice 5 pt rising wedge reversal topped by a beautiful weak right shouldered H&S. The failure of this pattern brought in a classic sequence of formations. We have a predictable measured move through the NL followed by a 9 month back test of that NL. A back test no doubt trying any short sellers patience, although once completed it lead to a phase III power dive. Another of histories “no one gets out alive” liquidations, where no one can come up for air. Note the classic tell tale signs of a bottom at the end of this phase III annihilation…lower volume on the final liquidation. The market bounced back immediately after the Pearl Harbor attack, a sign that the market was truly approaching sellers exhaustion. Despite profoundly grim war news the market bottomed 2 months before the battle of Midway, thus discounting an eventual allied victory.

The lessons we can learn from this series are classic. Despite its deceptive nature the formations are text book. The final decline was well telegraphed as we want to look for a final accelerated decline without increasing volume and that’s just what this bottom gave us in 1942. Again, no bottom calling until phase III is a rule that will allow us to win the battle for investor survival.

1973-1974 Cyclical Bear

This bear came mid-phase in the 16 year secular bear market from 1966-1982. It inked the bottom nominal price point of that era, although the market reached a lower value, inflation adjusted, in the summer of 1982. It’s actually a pretty classic sequence of what we would expect of see in a bear market. A H&S entry, followed by a long 5 pt expanding wedge reversal which sets up a classic 9 week BMR with confirming volume. Very similar to what we saw in early phase II in the current gold bear back in the summer of 2012. They were both just enough to convince everyone the previous bull market was back on. A rapid fall out of the BMR box on increasing volume, coincident with the oil embargo cinches the deal with a POR. Now, as always, we have a series of chart formations which ultimately resolve into a phase III liquidation. The first pattern to evolve after the November 73 crash is a nicely formed symmetrical triangle with an aggressive false breakdown followed by a run around the apex into a prolonged 4 point downward expanding wedge lasting 5 months. The resolution of this continuation pattern then ushers in phase III coincident with Nixon’s resignation. A violent treacherous vertical decent slices 34% off the DOW in the ensuing phase III over just 8 weeks with one week long short squeeze embedded in the fall. Anyone still holding the one decision buy and hold nifty 50 stocks were simply flushed down the hole. Phase III then ended with a classic bottoming sequence encompassing capitulation volume followed by a retest 2 months later on lower volume. Lower volume in phase III, accompanied with accelerated price decline means the all free klaxon is sounding. This bear showed that once the POR shows up one must get out and cease playing the long side. Once we entered into phase III there was no back test, it was straight down with just a one week squeeze in September 74. If you missed the bottom in late September you could suspect that it was not the real bottom, since high volume bottoms are normally retested. This is precisely what then occurred as the market double backed to retest on lower volume which is what we want to see.


1975-1976 21 Month Gold Cyclical Bear

This is the bear that everyone thinks is the analog to todays gold bear market. It was a 50% decline (futures actually dropped below $100) that served to shake out most of the gold bugs, just prior to the 8X advance over the next 3 years. I do find the entry psychology to the bear similar to the current bear. Gold peaked at the end of the year in 1974 in anticipation of the US legalizing citizen ownership. With thoughts that future demand would ramp the price the market peaked. This in my mind is the same dynamic which existed in Sept 2011 when Bernanke promised QE programs which would stoke the gold price . We start out with a classic H&S bear market entry superimposed over an expanding bearish wedge which served as a backtest resistance line to the H&S. Once the NL was violated the market needed a 2 month period to complete its back test which was combined with a false breakout of its early rectangle formation. This 5 month rectangle formation contained the price action until the normal POR-Crash-consolidation sequence we always see around the middle of phase II. At this point the market constructed a long 9 month 4 pt declining wedge continuation pattern which itself ushered in phase III. Notice the backtest only made it halfway back up to the lower boundary of the previous consolidation. This phase III included a 19% decline over 2 months. (note my phase III measures are from the beginning of the decline just inside the previous phase.) This phase III bottom carved out a very pretty classic inverted H&S bottom. Note the tighter abbreviated right shoulder, followed up by a back test on the NL and rapid advancement. Just how we like to see them. This bear served the function of shaking the confidence of even the most inner core faithful of gold holders, just as the current bear is in the process of doing. Very few people participated in the full run-up to the 850 top 3 years later principally because they violated the rules and principles we have discussed. One needs to have your financial and psychological capital intact once the uptrend resumes or you will be left back at the station. This is a pretty clean bear market ( vs. 1937), with all the classic sequences H&S entry, POR crash, phase III entry crash followed by a H&S bottom. What more could one ask for?




1989-1992 Tokyo First Cyclical Bear

This is the grandaddy of bear markets on the other side of the pacific. I spend a lot of time in Japan so I see the lingering effects of this bear constantly. It has wiped away the entrepreneurial spirit of the Japanese. I recall spending time in Japan in 1987 and the difference is night and day. This is just the first cyclical bear of the ongoing 20 year bear market in Japan and it has all of our familiar classical patterns. I remember Harry Browne laughingly offering a contest to his subscriber base in late fall 1989 to pick the top of the Japanese market. It was so obvious this was a bubble destined to pop and pop soon. Within a month it blew out, so Alan Greenspan who claims one can never see a bubble is clueless Mr Magoo. We enter with a long 9 month rising wedge which blows out the top in a state of euphoria, a classic end formation. It then celebrates the new year by doing an apex breakdown into a crash. Where else have we seen a bear market initiate itself in a crash??? 1929 of course and it was foretelling a similar fate, a launch of a secular deflationary bear market. What follows is 1929 all over again, a 28% 3 month crash right off the top, followed by a 4 month retracement rally which fails coincident with its POR. It is now hell to pay and we enter right into the second crash of phase II which crushes the market 40% over 11 weeks. Time to sell the vacation home in Hawaii. Post POR phase II consists of two major formations a symmetrical reversal triangle followed by….look at here… a diamond, which ushers in phase III. We also saw this diamond as the last stop in phase II in America’s great depression. Just like 1932 as soon as we exit the diamond we have the annihilation drive with a relentless collapse of 43% over 9 months. This is a long phase III.


To recap, it is amazing how these bear markets progress in similar nature. It shows how we must learn to interpret the markets signals because once we understand the basic principles we have clues to where we are. One must start by being attentive, since there is no captain with a bull horn to order investors into life boats when the investment ship hits the iceberg. One must figure it out oneself, don’t count on your investment advisor. And finally, one must navigate the shark infested waters so he arrives at the bottom with both capital and psyche intact. If we can do both we have a chance of winning the battle for investor survival.

Next essay I would like to drill down on Phase III and take a look at the psychology, and finally I would like to take a look at the other side of this beaten down PM sector…that would be the bright side as it actually has me very excited and I will tell you why.