Bear in mind that a sharp drop in the price does not indicate a downtrend. In a bear market, drastic downward swings are followed by upward reversals.
Price extremes on the chart can also indicate a downtrend. If each subsequent low and high are located below the previous ones, a bearish trend occurs.
Another easy way to determine a downtrend is to find a trend line. The indicator stretches over 2 consecutive swing highs. If a recent high is lower than the previous one, we see a negative slope on the chart. If we see a downward sloping line, it signals a bearish trend.
To confirm the downtrend, find even more highs to build the indicator. If there are only 2 swing highs on the chart, it means that the trend cannot be determined yet. Thus, you need to wait for a clearer signal.
When you determine the correct trend line, you can be sure that the trend persists as long as the asset is trading below this line. This line acts as a resistance level. If the quotes break through it, there could be a trend reversal.
Apart from technical indicators, you can also identify a downtrend thanks to fundamental analysis. As a rule, a bear market is triggered by:
The 2007-2008 financial crisis initiated one of the biggest downtrends in the US stock market. It lasted 517 days, or a year and a half. In 2020, at the height of the COVID-19 pandemic, the bearish trend was the shortest in history, lasting only 33 days.
This example confirms that a downtrend is usually short-lived compared to an uptrend, which can last even for several decades. Analysts have calculated that the average duration of a bear market is approximately 300 days or about 10 months. A bullish trend can last on average 990 days or about 2 and a half years.
Price extremes on the chart can also indicate a downtrend. If each subsequent low and high are located below the previous ones, a bearish trend occurs.
Another easy way to determine a downtrend is to find a trend line. The indicator stretches over 2 consecutive swing highs. If a recent high is lower than the previous one, we see a negative slope on the chart. If we see a downward sloping line, it signals a bearish trend.
To confirm the downtrend, find even more highs to build the indicator. If there are only 2 swing highs on the chart, it means that the trend cannot be determined yet. Thus, you need to wait for a clearer signal.
When you determine the correct trend line, you can be sure that the trend persists as long as the asset is trading below this line. This line acts as a resistance level. If the quotes break through it, there could be a trend reversal.
Apart from technical indicators, you can also identify a downtrend thanks to fundamental analysis. As a rule, a bear market is triggered by:
- recession or slowdown in economic expansion;
- changes in monetary policy settings;
- high unemployment rate;
- high VIX index:
- low demand for an asset;
- market panic;
- volatility of the main US stock indices;
- stocks decline by more than 20% from previous highs.
The 2007-2008 financial crisis initiated one of the biggest downtrends in the US stock market. It lasted 517 days, or a year and a half. In 2020, at the height of the COVID-19 pandemic, the bearish trend was the shortest in history, lasting only 33 days.
This example confirms that a downtrend is usually short-lived compared to an uptrend, which can last even for several decades. Analysts have calculated that the average duration of a bear market is approximately 300 days or about 10 months. A bullish trend can last on average 990 days or about 2 and a half years.
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